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Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Sir, you may begin.
Thank you, and good day, and welcome to the MSCI Fourth Quarter 2025 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2025. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements.
For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation.
We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; Andy Wiechmann, our Chief Financial Officer; and Baer Pettit, our President. Lastly, we wanted to remind our analysts to ask one question at a time during the Q&A portion of our call.
We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?
Thank you, Jeremy. Good day, everyone, and thank you for joining us today. MSCI is generating impressive momentum across product lines and client segments. Our leadership in the global investment ecosystem and relentless focus on innovation has enabled us to drive a strong financial performance.
In the fourth quarter, we achieved organic revenue growth of over 10%, adjusted EBITDA growth of over 13% and adjusted EPS growth of almost 12% for the quarter and almost 14% for the full year. Our attractive all-weather franchise, client centricity and alignment with favorable long-term secular trends have positioned us to deliver on the long-term growth targets we have set for MSCI. Since MSCI's IPO a little over 18 years ago, we have achieved a compound annual growth rate of nearly 13% for total revenue, nearly 15% for adjusted EBITDA and over 16% for adjusted EPS. In addition, we have now delivered 11 consecutive years of double-digit adjusted EPS growth.
We intend to continue with all these records at MSCI for the years and decades to come. In the fourth quarter and through yesterday, we also bought back nearly $958 million of MSCI shares at an average price of about $560 per share. Over the last 2 years, we have repurchased almost $3.3 billion of our shares at an average price of $554. As you can see, we have a very strong conviction on the prospects and potential of MSCI, and we believe our franchise remains undervalued. In Q4, MSCI's operating metrics included net new subscription sales of $65 million and nonrecurring sales of $31 million, bringing total net sales to over $96 million.
Q4 was, in fact, our second best quarter ever for recurring net new subscription sales, and we grew a growth rate of 18%. Across MSCI, our retention rate was over 94% for the full year. All of this resulted in total run rate of over $3.3 billion, growing 13% and comprised of total ABF run rate of $852 million, growing 26% and recurring subscription run rate of over $2.4 billion, growing over 9%. Q4 showed how MSCI is using our deep rooted competitive advantages to drive growth.
With newer client segments, in particular, we are doubling down on key opportunities while reinforcing our position as the essential intelligence layer of global investing. So for example, our index flywheel is helping clients form thematic baskets, gain global exposures, unlock new distribution channels, launch tradable products and hedge exposures. In Q4, we delivered our best quarter ever for new recurring subscription sales in Index. Meanwhile, total ETF and non-ETF AUM linked to MSCI indices reached approximately $7 trillion, driven by record inflows into our clients' ETF products linked to MSCI indices, particularly listed ETF products in Europe.
In general, asset-based fees remain a consistently strong contributor to our top line with a durable track record of positive annual cash inflows into ETFs linked to MSCI indices every year stretching back more than a decade. We also had a strong quarter in Analytics, where we posted our second best Q4 on record for new subscription sales. In Private Capital Solutions, we drove recurring sales growth of 86%, supported by our rollout of innovative new products and landing new client relationships. In Sustainability and Climate, our new subscription sales were lower than last year's levels, with particular softness in the Americas.
In Sustainability, MSCI is expanding our solutions across all client segments and asset classes to address emerging risks and opportunities that go beyond environmental, social and governance matters. Examples include AI and supply chain disruptions on companies and fixed income instruments in people's portfolios. In climate, MSCI is emphasizing physical risk and energy transition tools that promote consistent standards and a common language across companies, industries and regions. Physical risk is just one area where we have been leveraging AI to enhance our capabilities with tools such as geospatial asset intelligence.
We're also harnessing AI to enhance our solutions in custom indices, risk insights, ESG controversies and private assets. For example, MSCI has decades worth of historical data on private markets, and we're now using AI to process this data in significantly larger volumes and then feed it into our total portfolio insights. Our company-wide total embrace of AI represents a technology power transformation that will increase the value of our tools for clients across the board. I will now review our Q4 performance among individual client segments.
In general, MSCI is unlocking significant opportunities across high-growth client segments. With hedge funds, MSCI delivered 13% subscription run rate growth and 26% recurring net new sales growth. One prominent deal in the quarter was the index rebalancing team at a top global hedge fund for MSCI's new extended custom index module, which spans almost 5,000 custom indices. This highlights the growing appeal of our index product ecosystem and the need for more tools from MSCI.
Moving on to wealth managers. MSCI achieved nearly 11% subscription run rate growth, including 15% recurring sales growth. As we drive further adoption of our index and analytics tools among home offices and wealth platforms of large investment managers. For example, in Asia, we closed 2 major CIO office deals for our multi-asset class factor models, which helped make 2025 our best year ever in new recurring subscription sales in the wealth segment in APAC.
Among asset owners, MSCI posted close to 11% subscription run rate growth along our strongest recurring net new sales growth in 5 years, driven by private capital solutions and analytics. For example, we are seeing rising demand across regions from pension and sovereign wealth funds for our total portfolio solutions spanning public markets, multi-asset classes and especially private markets as clients increase their private asset allocations. Shifting to banks and broker-dealers, MSCI delivered subscription run rate growth of over 9% with large deals from index and analytics. The expansion of basket trading among banks has created new opportunities for us given our capabilities in quantitative investment strategies and custom indexing.
In Q4, this trend helped MSCI secure a landmark deal for our new basket builder solution with a prominent bank in the Americas. Using our tool, traders can rapidly create a standard and custom index baskets across client and internal workflows with MSCI index content and IP forming a fundamental basis of these baskets. Turning finally to active asset managers. MSCI achieved recurring net new sales growth of 13%, primarily driven by index, along with subscription run rate growth of over 7%.
Our Q4 results bode well for the gradual recovery of our performance with this important client segment. Active ETF products remain an exciting opportunity for active asset managers and for MSCI. In 2025 alone, MSCI supported our clients' launch of over 50 new fee-generating active ETF products in the market. As Q4 demonstrated, we are well positioned to benefit from AI, accelerate innovation and drive adoption of new and existing products for established and emerging client segments while still delivering compounded EPS growth for shareholders.
And with that, let me turn things over to Andy. Andy?
Thanks, Henry, and hello, everyone. It's great to see the strong momentum across the business. This momentum is supported by our pace of innovation that is fueling growth across client segments and product areas. Index subscription run rate growth accelerated further to 9.4%, including 16% growth in custom indexes with some key wins among banks and hedge funds, as Henry highlighted.
We also had success with asset managers, where index recurring subscription sales growth was nearly 10% and index subscription run rate growth was slightly above 8%, reflecting the expanding usage of our content. Index retention remained strong at nearly 96% for the full year and 95% for the quarter. The acceleration in index subscription run rate growth was complemented by asset-based fee run rate growth of 26%. Equity ETFs linked to our indexes captured a record $67 billion of inflows during the quarter, totaling $204 billion for the full year.
This growth is driven by extremely strong inflows into ETFs linked to MSCI developed markets ex U.S. indexes, including EFA and World and MSCI Emerging Markets Indexes, where we see large and rapidly expanding ecosystems being established around our indexes. We see extraordinary runway to fuel those franchises well into the future, and we are extending the ETF agreement with BlackRock through 2035 to solidify that tremendous future growth. To enable this growth, we will lower the fee floors impacting certain superscale ETFs on which we have been capturing a larger share of the overall economics.
The aggregate impact will translate to be roughly 0.1 basis points based on year-end 2025 AUM levels with roughly a 0.05 basis point decrease on January 1 of this year and another 0.05 basis point decrease on January 1 of next year. Outside of the timing of these adjustments, we expect the fee dynamics to remain consistent with the trajectory we have seen before with respect to our overall ETF basis points. Our close partnership with clients like BlackRock and the shared success we've achieved together position us well to drive enormous upside. In Analytics, we had subscription run rate growth of over 8%, driven by our second highest Q4 ever for recurring sales and higher retention.
Recurring sales in Analytics benefited from strong sales of our enterprise risk and performance tools, notably with banks and asset owners in addition to continued momentum with our risk models. In Sustainability and Climate, one of our largest Q4 new subscription deals was with a large European wealth tech firm, positioning MSCI to be the embedded provider of Sustainability Solutions for small- and medium-sized wealth managers in Europe aided by our clients' distribution network. This win drove a meaningful contribution to the product line's new recurring subscription sales in Q4. In Private Capital Solutions, we saw growth accelerate on the back of closing almost $8 million of new recurring subscription sales in the quarter, an increase of 86% from the prior year.
We've seen strong traction with our total plan offering and our transparency data, both of which have benefited from numerous enhancements and new capabilities. In Real Assets, run rate growth was almost 6% with improving retention as well as sales of new solutions. Turning to our 2026 guidance, which we published earlier this morning, our expense outlook reflects the powerful operating leverage benefits of our business with continued investment initiatives fueling future top line growth. I would highlight that CapEx reflects the anticipated build-out of a new London office space as well as increases in software capitalization related to key business investments across products.
Our full year tax rate guidance reflects an expected Q1 tax rate of 18% to 20%, which is higher than past years as we will likely have a slight stock-based compensation headwind this quarter. Free cash flow guidance reflects the expectation of approximately $100 million of higher expected cash taxes in 2026 compared to 2025 due to various onetime discrete tax benefits in 2025 and the timing of cash tax payments between '25 and '26. Our capital position remains strong with an ending cash balance of over $515 million at the end of December. Subsequently, we have paid down $125 million on our revolver, which now stands at $175 million.
We will continue to pay down and draw the revolver in modest amounts from time to time to support our capital uses and optimize interest expense. In summary, MSCI's strong Q4 results are reflective of our mission-critical, durable solutions and our accelerating pace of innovation. We are seeing solid momentum in delivering new products, capabilities and enhanced go-to-market efforts, and these are translating through to tangible results. We are focused on meeting client needs and enhancing value across client segments by delivering increasingly integrated solutions.
As we've said in the past, the goal of MSCI is to have a fully integrated company in which each product line benefits from and contributes to every other product line. This will amplify the powerful compounding financial algorithm that has fueled our business, and we remain committed to delivering the firm-wide long-term targets of low double-digit revenue growth, excluding ABF, adjusted EBITDA expense growth of high single digit to low double digit and adjusted EBITDA growth of low to mid-teens, enabled by the powerful operating leverage of our business. And we expect ABF to be an outsized double-digit grower through cycles and a key driver of the financial algorithm.
However, we will no longer maintain product line-specific long-term targets to better reflect our focus on managing our investments across integrated product lines and delivering outsized growth across the company. Lastly, this change will not impact our current reporting, and we will continue to provide the same level of transparency and disclosure with continued reporting along product lines. As you can tell, we are very excited with the strong pipeline and opportunities in front of us, and we look forward to keeping you posted on our progress. Before we open the line for questions, I'll turn it back to Henry, who wants to take a moment to recognize Baer as he approaches retirement.
Thanks, Andy. I want to take this moment to recognize my business partner and friend of 26 years, Baer Pettit, who has played a critical role in turning MSCI into the standard setter we are today. Baer announced his retirement in November, and he will formally step down as President on March 1. I know I speak for the entire senior leadership team at MSCI when I say that we will miss him tremendously. Looking ahead, I'm now excited to work with Alvise Munari and Jorge Mina, who many of our shareholders and the analysts that follow us already know very well as we seek to build on MSCI's momentum and deepen our relationships with both newer and more established client segments.
And with that, over to you, my very good friend and business partner of many decades, Baer Pettit. Baer?
Thank you, Henry, and greetings to you all on this my final earnings call. As you may doubtless imagine, this is something of a difficult moment for me and one about which I have mixed emotions. Serving as MSCI's President and a member of our Board of Directors has been a tremendous honor and privilege that I could not have imagined when I joined the firm's Head of EMEA coverage over 25 years ago. Not many people get the chance to impact the global investment ecosystem, and I'm grateful to have had the unique opportunity to help lead MSCI's growth and influence on the investment industry.
As a long-term owner operator, I was clearly delighted by the Q4 results, which show the resilience of that all-weather franchise, which we have spoken about on numerous occasions on this call. If there's one thing that has characterized MSCI in the quarter of a century that I've been here, it is the firm's constant ability to reinvent itself and to seek new opportunities in a variety of market and industry context. Many of those opportunities have proven to be extremely resilient and will remain a source of shareholder value for many decades ahead. The highly creative and client-focused teams at MSCI are wired to always keep looking for new opportunities and to drive client value and hence, the growth of the firm.
The evolution of MSCI into a truly multi-asset class provider of insight and actionable content for investors and other market participants has not happened overnight. The content and capabilities have grown both through organic investments and the variety of acquisitions with which you are familiar. The great power of the MSCI franchise is rooted in our talented people, who I know will continue to set new standards and drive innovation. It is also grounded in the value that our clients and shareholders derive from the growing number and variety of solutions MSCI deploys.
This is what in the past I have referred to as 1 plus 1 equals 3. Notably, it is clear that the efforts that have been put into private markets are really starting to pay off and that this strong combination of public and private markets capabilities will be a key driver of our franchise. And these capabilities create opportunities in a variety of client segments across the globe. I have no immediate plans ahead of me. It truly has been an amazing journey for which I thank all my colleagues at the firm.
I'm certain that as a shareholder, my retirement savings are in good hands and that this great franchise will continue to create value for clients, shareholders and employees for a long time to come. Thank you very much. And with that, operator, please open the line for questions.
[Operator Instructions] Our first question for today comes from the line of Toni Kaplan from Morgan Stanley.
Baer, I really wish you all the best. Henry, I wanted to talk about AI. You talked about some of the launches that you made. Which do you think are going to be sort of the most meaningful for adoption in the near or medium term, however you want to frame it?
Which clients are showing the most interest? And I guess, what could this mean for your growth rate both in maybe '26, but also even beyond that?
Thank you, Toni. The journey with AI started 3, 4 years ago for us and initially has been extremely focused on creating AI agents to help us with the day-to-day operations of the company. We use AI extensively in applying to understanding controversies, for example, on ESG ratings. We've been using AI very, very deeply in the gathering of tremendous amount of data in the private markets and private assets and the like.
So those are 2 big examples, but we -- there are about 120, 140 projects that cut across the company in using AI to augment the capacity of our smart and talented employees to leverage their smartness and capabilities. Then halfway through it, we started focusing intensely on using AI for products. The first application of it was in our Analytics business in terms of putting AI insights into the portfolios that are running in our servers for our clients, AI insights to understand the performance, the risk, the correlations. So in a way, it's like adding hundreds of people on people's eyes, in this case, digital people, of course, agents to understand what's going on in the performance of our portfolios and the activities of our clients' portfolios.
And therefore, that has taken off. We've had a lot of embrace of what we call AI insights in the Analytics product line. So that's been a big benefit. Then we look at AI in terms of automating the custom index creation capability.
As you know well, we've been working for a couple of years on designing a software application integrated with our production environment to create a large number of very fast custom indices and custom baskets for trading, for investment, for investment products and the like. One of the things that we realized was a slowdown in that process is the human interaction of understanding the methodology, back testing the methodology and all of that. So we've been training AI agents to do that process much faster than the humans with obviously a lot of human supervision, right? So that is something that is already in place and it's already being rolled out as another example of that.
So I think that most of our product lines will benefit enormously with AI agents in terms of either servicing the client or giving insight to the portfolio to our clients or being able to much faster create IP and the like. But I just wanted to highlight 2 examples on the efficiency side in terms of controversies and data capture and private assets and 2 examples on the product side. But I could give you 20 other examples in each category, but I just wanted to exemplify the enormous potential. The last thing that I would say is still early days in our application of AI across the board in MSCI.
And we're extremely excited. The company is turning into a total AI machine, and we think it's a godsend to us, as I've said in the prior call.
And our next question comes from the line of Alex Kramm from UBS.
I wanted to come back to a topic that I think I asked about a couple of times last year, which was this whole idea of international flows picking up and flows moving away from the U.S. I think we've started to really observe this in the marketplace now. I heard there was a recent asset management conference in Europe where the sentiment was better than it's been in years. So it seems like there's excitement growing in your customer base.
So wondering if this is actually starting to drive new sales, better conversations? And maybe most importantly, is it giving you better opportunities for maybe pricing a little bit more aggressively?
Thank you, Alex. All of the above for sure. Now we're a subscription business, as you know. So things don't take off immediately the same way that they don't go down immediately.
So all of this stuff takes time. And of course, you -- a lot of what we do is serve the long-term asset owners in the form of pension funds, sovereign wealth funds, endowments, foundations, family offices and the like. And a lot of those parties don't turn their portfolios on a dime, right? They look at the secular trends, they take their time and all of that.
So obviously, as you know well, Alex, the immediate effect has been in the devaluation of the dollar. Obviously, the dollar has been out of favor and people have been selling the dollar and selling dollar assets, as we know. And therefore, that has translated into significant flows into MSCI equity indexes that are ex U.S., developed markets ex U.S. And likewise, we've seen the revival of emerging markets as well.
I mean, we saw Korea hitting an all-time high for a couple of days this week. and the like. So we are definitely seeing the benefit of that. And we're seeing the benefit in the flows, the $200-plus billion of flows into ETF linked to MSCI indices, the ETF of our clients linked to MSCI indices. That is a strong indication that people are putting their assets in non-dollar assets, right, in those dollar securities.
So that's another trend. On the subscription side, we, for sure, have seen a significant uptick in activity in Europe, in EMEA. Evaluating our -- in one of our QBRs last week, we were very pleasantly -- or pleased and surprised to some extent that our run rate in EMEA in Index including subscription and ABF is higher now than the Americas, which is an incredible feat, right, to achieve given the nature of the capital markets in the United States. And that is on 2 fronts.
One, the subscription of our products in EMEA plus obviously, the huge inflow of assets into EMEA listed ETF. I mentioned that in my prepared remarks that we have seen a significant increase in inflows into ETF listed in Europe. So we're seeing that. And we had a very strong quarter in Asia Pacific, obviously, in the fourth quarter.
Obviously, sometimes it is -- one quarter is very strong. The other quarter may be a little weaker or softer. But I think that we have a very great franchise in APAC, and we're beginning to see significant activity inside APAC, and away from the APAC investors going into dollar assets. But it's still very early days in all of this.
The great rotation of assets away from dollar assets in the U.S. is just an early analysis. It is too early to tell whether that will continue on a secular basis or it's just cyclical for now, given the geopolitical aspects and the economic aspects, but we're well positioned either way.
And our next question comes from the line of Manav Patnaik from Barclays.
This is Brendan on for Manav. Just wanted to ask on the private assets, look like it has its best net new quarter. And it's been -- you've obviously been excited about the opportunity there, but it's been taken some time for it to unfold. But I guess what drove that? And then is this the early innings of a trend do you think? Or is there some kind of onetime item? Or what do you guys see there?
Sure, sure. Yes. Thanks, Brendan. It's Andy.
So yes, it's been great to see the PCS run rate tick up. We also saw the real asset run rate growth tick up a bit. And we are seeing encouraging trends on a number of the key areas that we've been investing in and building out and enhancing over the last couple of years. Maybe just to give a couple of areas of focus and areas where we've seen traction on the PCS side first.
The strong sales were around areas like our total plan offering, which we've been really developing and proactively going to market around as well as our transparency offerings. Both of those, we've seen very good momentum on and a pickup in growth rates. We saw good growth not only in Americas, which, as you know, is a big part of the PCS franchise, but we saw actually tremendous success and traction in EMEA as well. That's been an area we've been intently focused on and building out our go-to-market effort, and we are starting to see some shoots there, which is encouraging.
The outlook is positive. We believe this is a massive, massive opportunity for us. We've got a very robust product development pipeline. And so we've mentioned some of these in the past, but we continually come to market with capabilities and content sets that really don't exist in the market today, and we know there is strong demand for.
So things like our recently launched Document Management and SourceView offering. We're seeing significant client interest around that and positions us to do more for clients, so continue to expand the value that we are bringing to them. And by the way, that's something that is enabled by AI as well. And AI has been a key enabler, not only on the data sourcing front, as Henry said, but also expanding the range of capabilities and insights we can give to clients.
I would also highlight things like our asset and deal level metrics, things like our suite of indexes, including our private capital -- or sorry, private credit indexes are all things that we're now in a position, I think, to drive that adoption and standardization. And so it is good to see the strong fourth quarter. We see attractive opportunities ahead of us. We see good momentum here and think we can continue to drive that.
And we are also getting strong traction with a wide range of partners and distribution channels such that our content and solutions are going to be increasingly accessible and easily usable across a wider range of the ecosystem, and that includes in areas like the wealth channel, which we believe is a big opportunity. On the real asset front, definitely some positive signs there. I think we've seen some green shoots in the industry. I think investment rose in the U.S. across nearly all commercial real estate sectors.
There are some areas like office and retail, where there is double-digit growth. And we've seen private capital moving from not only institutions, but we've seen private investment dollars coming back in as well. So it's all good signs, and we're seeing that translate through to some early movement. We still got a ways to go, but early movement with our Index Intel offering and traction with our -- some of our new products like our data center product.
So early days on that front, but definitely encouraging, but very exciting around the PCS opportunity.
And our next question comes from the line of Ashish Sabadra from RBC Capital Markets.
Andy, I wanted to ask you a question about the free cash flow puts and takes. You obviously called out the $100 million of cash taxes impacting free cash flow. I know you don't guide -- so I was just wondering if you could talk about some other puts and takes like CapEx and interest expense and stuff like that. And I know you don't guide to adjusted net income and EPS, but we all look at free cash flow as a proxy.
So is the right way to think about it like on top of free cash flow as that cash tax and the reduction in share count, and we should still get the low to mid-teens EPS growth in '26 in line with the long-term targets?
Yes. So I would -- I'd highlight a few things in addition to the cash taxes, which was a meaningful item here. But we've got a couple of sizable timing-related items that are depressing the free cash flow in 2026. But I would highlight that we are projecting strong double-digit collection growth with stable working capital dynamics. So the core fundamental underlying dynamics of the business remain quite healthy.
In addition to the cash taxes, which, as I alluded to, is expected to be roughly $100 million higher than 2026. Part of that relates to some tax payment deferrals from '25 to '26, about $30 million of those and roughly $50 million of onetime discrete benefits in '25. But on top of that, we also, as a reminder, issued -- had 2 debt issuances in the third and fourth quarters of 2025. Just given the interest payment schedules on those, we had no cash interest payments in '25. So there's going to be a meaningful step-up in the cash interest expense in '26 to the tune of $90 million. And so that creates some noise in that period-to-period comparison.
And then the last thing I would highlight, and you see this in the CapEx guidance is we are building out a new London office space. As you know, London is one of our key offices, one of our bigger offices. We are moving locations there, and we'll have meaningful CapEx around that build-out, which will amount to about $25 million of occupancy CapEx. Beyond that, we are -- and I alluded to this, we are continuing to invest in software solutions.
Henry touched on this, notable investments into custom index and basket builder capabilities, which we're very excited about, many of the PCS capabilities that I just alluded to. And so that also is adding to the CapEx. But those 3 items are leading to some comparison noise when you look at '25 versus '26. But if you look at top line and cash collections continues to be very healthy. And we continue to believe there's a strong trajectory of free cash flow growth going forward here, particularly free cash flow per share.
And our next question comes from the line of Alexander Hess from JPMorgan.
First of all, Baer, congratulations on your retirement. And yes, congratulations again. I want to maybe ask about the reiteration of the medium-term targets and then some comments, Andy, that you said that about the strength of the pipeline. Can you give us a little bit more color on how you break down that pipeline strength into sort of a cyclical uplift, the megatrends that have been discussed on the call versus new product innovation?
I know that you called out sort of a number that, that was last quarter on new sales. But just sort of any color on what's driving that pipeline would be really helpful and how that might convert into the low double-digit target.
Sure. Yes. So as I mentioned, we're definitely encouraged by the pipeline. Henry alluded to this earlier, but there is an environmental dynamic here on the margin.
I think we've seen constructive buying behavior across many client segments. On the margin, we've seen a good degree of confidence on a number of fronts. I think the sustained favorable market momentum is something that does feed into that confidence. And as we mentioned, we saw pretty good results and some improvement in sales and growth with asset managers, which is an area where, listen, we continue to see the secular pressures, and we'll continue to see some of those secular dynamics at play.
But we've seen on the margin a slightly healthier environment across asset managers. But I would highlight, most importantly, as you alluded to, a lot of the momentum we see and the pipeline opportunities are related to the actions that we are taking. And so it does relate to the innovations that we are releasing across the company, our enhancements to client service and go-to-market and our orientation around client segments. I think on all those fronts, we're opening opportunities up in many of these new big client segments as well as within our existing well-established client segment areas.
So we're seeing decent momentum on both fronts here. Just to specifically hit your question about new product contribution to sales. Listen, we saw in 2025, roughly a 20% increase in the contribution to recurring sales from recently introduced products. We continue to see a strong and building pipeline of opportunities related to those new products and those cut across almost every part of the company, but it's something that is definitely creating pipeline opportunities for us.
So we're definitely excited.
And our next question comes from the line of Kelsey Zhu from Autonomous.
On ESG, I guess, a while ago, we talked about the regulatory headwinds or regulatory uncertainty in Europe and how that's impacted growth. What are you seeing in that market more recently? And when should we expect ESG to recover in Europe?
So the recovery in Europe is already taking place. No doubt about that. Not at the pace that we wish it will be happening, but it's already taking place. Obviously, it's in the context of a new reality that not everything in terms of performance and portfolio construction needs to be ESG when the pendulum swung too far on that side.
The big, big focus is on financial materiality in people's portfolios. And we're also benefiting from a consolidation of suppliers of ESG data and ratings and analytics into the European market. We alluded to this in the prepared remarks that one of the important sales that took place in Sustainability was this wealth technology platform in which we have -- we become the supplier of choice compared to others, and they've eliminated that other supply. So there is a benefit that we're getting from that.
I think -- so I'm hopeful and the pipeline indicates that we will continue to grow at a decent clip in Sustainability in Europe. I don't think we have reached bottom yet in the Americas market, in the U.S. market, not in Canada, but in the U.S., given some of the political sort of undertones in the various states and all of that. So that will continue to be soft. I think we're holding our own, and we're consolidating.
We're being very aggressive in displacing others in the marketplace, et cetera, but that is going to remain a pretty significant battleground on that. And in APAC, the business never took off totally, and it kind of slowed down a little bit given all the issues around the world. But we've been putting in place new management, new salespeople, new dialogue and penetration. And I think that it will be a meaningful, maybe not a strong contributor to our Sustainability sales.
Now more importantly than all of this, I will say, strategically, is one of the things that is completely dawn on us was that the onset of the ESG revolution, so to speak, was just the early days of understanding emerging nontraditional risks and opportunities and the analysis of securities and then the build-out of portfolios. So as time goes by, we will be using a lot of our expertise and our data and our client relationships to expand the ESG/Sustainability franchise into analyzing the effect of other risks in portfolios. And those are obviously, tariffs. We have enough data and capabilities to analyze where companies are producing goods and services, right, and where they're selling them.
Supply chain, the effect of AI on companies, we have enough data and are getting much more to analyze the effect of AI. Is it a good thing for a company? Is it a bad thing for a company and the like. So obviously, climate will be the mother of all emerging risks in clients' portfolios.
We will be doing that, especially on a physical risk basis. We're really pivoting significantly from not just transition risk, but to physical risk, which is where the big demand is today and especially with shorter-term pools of capital like banks and insurance companies in addition to the longer-term pools of capital. So we're very excited about this area of our business. It is going through a transformation for sure.
It has slowed down, but we're hopeful that with all the comments that I made plus the pivoting towards other forms of emerging risk, given the franchise that we have and the expertise that this will be a long-term grower for us.
And our next question comes from the line of Craig Huber from Huber Research Partners.
Baer, all the best to you going forward. I thought you did a great job. Andy, on the cost side of things, have a couple of quick questions here for you. As you know, the last 4 years or so 2021 to '24, your Analytics costs were flat, give or take.
And then the last 2 quarters, back half of last year, they're up 11% to 12%. Can you just give us a little more understanding about what you guys are investing in there in the Analytics area? And is this -- what should we expect there in 2026? And then my nitpick question on the Sustainability and Climate side of things, your costs there in the fourth quarter, I guess, were down about 6% year-over-year.
Was that just some true-up maybe you did on maybe bonus accruals? Or what happened there? I want to understand that also going forward for Sustainability.
Sure. Yes. So Craig, on the Analytics side, we can get some natural lumpiness, both on the revenue side and on the expense side and the expenditure side more generally in Analytics. Things that will impact EBITDA expenses, but overall operating expenses as well are things like the level of capitalization that we see in any given period.
Expenses like severance, and that's something where we did see some variance, particularly in the fourth quarter, can cause some swings in period-to-period comparisons. FX is one that you've probably seen in the past. We do have some meaningful exposure to non-USD employee expenditures on the Analytics side. So FX, especially when you see a depreciating dollar can lead to some expense pressure there.
And so a lot of it is just kind of the traditional drivers of lumpiness that we will see. There have been some elevated expenses related to infrastructure investments that we've been making. Again, I wouldn't focus too much on that, but that has been a piece that stepped up. We are, as Henry alluded to, making a number of enhancements around our AI insights, many of the capabilities that he alluded to in terms of being able to dynamically build baskets, look at signals -- investment signals on a real-time basis.
We've got some very cool projects going on and continue to build out capabilities in other frontiers across our equity analytics and multi-asset class analytics. So I wouldn't focus too much there. And as you know, we don't necessarily solve for -- aren't driving for specific margin or even expense growth rate in any specific segment, but continue to allocate just based on where we see the attractive investment opportunities. Yes.
On the Sustainability and Climate front, listen, I would say along those same lines, we always manage our expenditures dynamically, and we are proactively allocating based on the opportunities we see and market dynamics. We are continually reallocating to those areas that we think generate the fastest payback and have the highest return. We continue to invest in definitely key areas in Sustainability and Climate. Henry touched on a number of those areas that we are focused on.
But on the margin, there are areas where we're investing less. And so on the full year, you did see roughly flat. I think it was 2% expense growth, as you alluded to in the fourth quarter, down 6%. So there is some noise around other expenses that can be lumpy, but you can see we are generally growing expenses less in Sustainability and Climate.
And our next question comes from the line of Owen Lau from Clear Street.
For private asset, you highlighted a number of opportunities there. One of the key themes in this space is tokenization. How does this tokenization trend impact your world or you don't see much of an impact at this point?
Sure. Yes. So I think it is potentially a big catalyst for us on a number of fronts. I'd say it hasn't been significant to this point.
I think it can have a significant impact on markets and financial products, a number of areas that we are focused on and see big potential. But your question specifically around private assets, listen, we know there is -- and this is why we are investing in the space and seeing tremendous opportunities. Investors are getting deeper into what is in their portfolios, understanding their risk, what's driving returns, what's the value that managers are providing, how to think about, I'd say, more of a traditional asset allocation across private assets. And so you see a tendency, especially with more open-ended type vehicle structures and continuation funds that people are more dynamic in how they invest their money across private assets.
And it is a cumbersome process today. I think as many of you appreciate, we have seen tremendous growth in the secondary markets there, both secondary funds, but also secondary transactions of LP interest. As the world moves towards tokenization and really streamlines ownership transitions, sales and purchases of private assets, it's going to necessitate the need for things that we are investing in, like evaluated prices, like credit risk, like portfolio tools. And so we think tokenization could be a big accelerant for not only the private markets generally, but the tools that we offer.
And our next question comes from the line of Scott Wurtzel from Wolfe Research.
Just wanted to go back to some of the remarks you made on the active asset manager end market. I mean it sounds like there's been a little bit of a shift in tone towards kind of more positive outlook on that end market. So just wondering if you can kind of share a little bit more color on some of the trends you're seeing there and what's driving maybe a little bit more positive sentiment on the outlook there.
Yes. So clearly, active asset management in a world of high concentration in indices, especially the superscalers and technology have had a tough time performing relative to indices around the world. So we have seen continued outflows, cost pressures and the like. So what we have done throughout '25 is evaluate which is the best way that we can help this industry.
They need us badly in order to return to high growth and profitability. And so I alluded to the move of active portfolios to an ETF wrapper and MSCI can play a very large role in doing that. Secondly is to help a lot of these clients create investment products so that we are turning -- gradually turning MSCI from a cost center in the -- inside many of these managers to trying to be a profit center, a revenue-producing center, a new product development center. Now not every manager will want us to be as proactive, but we are offering that opportunity to people in that.
We are also helping clients consolidate suppliers into us. We're an extremely reliable, dependable supplier. Many of these active managers have a lot of -- a dozen index suppliers, a dozen analytics suppliers and all of that, and they can easily consolidate to us. So that's another initiative that we have and therefore displacing competitors in that area.
So it's a gradual process. But the important part, and I think what you're seeing in the results is that we are -- we took a meaningful part of the first half of '25 to say we need to change the way we approach this segment. We cannot continue to be just one more cost pressure on them, and that's bearing a lot of fruits. And the journey is still early, and we believe that we can return to higher growth with them.
And our next question comes from the line of Faiza Alwy from Deutsche Bank.
I wanted to ask about the AI efficiencies that you referenced earlier in the call and have referenced previously. So sorry for the 2-parter. But one, I'm curious if you're able to potentially quantify some of the benefits from the efficiencies that you're expecting this year and how much incrementally you're able to reinvest in the business? And then I guess, longer term, I know you haven't changed sort of your longer-term outlook around profitability, but I'm curious if at some point, this can result in better profitability over time?
Or do you think there's just going to be continued reinvestment, whether it's in the form of new products or potentially some pricing give back to your clients?
Yes. So it's definitely a question that necessitates maybe a long answer, but we're going to try to be as brief as possible. We can follow up with you offline. The first thing strategically to recognize is AI is a godsend to us in 2 directions.
The first direction, very importantly, is that through the application of AI, we can lower the run rate of expenses in our existing business. And in doing so, we can then take those savings and put them back into the run rate of investments in what we call the change the business, the new innovation, the new areas. We have enormous opportunities at MSCI, and we are severely handicapped in prosecuting all those opportunities by the size of our investment dollars. And we have been extremely disciplined not to take the money out of the profitability of the company.
It has to come from the reallocation of cost in the company. So that is something that is beginning to play into the expenses of the company in 2026. It started a little bit in '25, but it's going to play in '26, it's going to accelerate in '27 and then accelerate further in '28 to the point in which we can grow the rate of growth of our organic investments in the company at a much higher pace, probably double the pace that we've been growing so far. So that is a significant opportunity for us. The second one is AI is going to help us accelerate significantly the pace of product introduction because, for example, we've been able to -- through AI and the application of AI to gather much more data and more granular data in private assets.
And that has allowed us to create terms and conditions of credit in private credit, have been able to help us analyze the holdings of funds so we can create eventually holdings-based private asset indices and things like that. So that's going to accelerate us quite a lot. And since we've never been a big workflow software applications company, AI also will help us accelerate the ability of people to use our content. We have something called at MSCI, how do our clients consume our content?
We do analysis of every product line like that. And through AI, our clients will be able to consume our content much easily, much broadly than through sort of inflexible sort of workflow applications and the like. So those are a few examples of that. Why don't we take it offline so we can -- our team can tell you more about the quantification of all of this.
And our next question comes from the line of George Tong from Goldman Sachs.
This is Anna Wu on for George Tong. I wanted to start by extending our congratulations and best wishes to Baer. My question is on cancellations. Can you give us some color on conditions you believe that needs to occur before we might see a sustained reduction in cancellations? And how do you see those underlying dynamics across segments?
Yes. Maybe an overarching comment here, and I alluded to this earlier, we are seeing some improvement in overall client dynamics on the margin. Generally, it's relatively consistent. But on the margin in areas like asset managers, even in places like EMEA, we are seeing some improving dynamics.
So that's helpful. I would say the areas where we see lower retention rates are in -- and you've seen a slightly lower retention rate in Sustainability and Climate. I think Henry alluded to some of the pressures that we're seeing in the Americas on the Sustainability and Climate front. And then in real assets, we've seen a slightly lower retention rate, although it has been lumpy and has improved in spots.
And as I alluded to, we are seeing some encouraging trends on the real asset front. Outside of that, we, I think, are seeing pretty good engagement from clients. We're seeing overall health improving. And I think a key component of driving the higher retention rates beyond just the environment are the things that we are doing.
So enhancements to client service, which are resulting in enhanced client satisfaction, improvements in the products that we're releasing and the innovations we talked about, many of which are to facilitate and support price increases. And so I'd say we'll continue to see some of the pressures in those same areas. I've mentioned this in the past on the Sustainability and Climate front, on the real asset front, some lingering pressures in parts of the asset management market. But overall, I'd say we've got good momentum, and we're doing the right things to drive strong engagement and retention.
And our next question comes from the line of David Motemaden from Evercore ISI.
Andy, in the past, you had mentioned some potentially elevated cancels for asset managers in Europe. I'm wondering if that played any impact on the retention levels this quarter and how you're thinking about that in 2026?
Yes. It's -- listen, building off the last question and my response there. Yes, it has been one of the dynamics that we've seen for the last couple of years actually. We've seen a slightly lower retention rate in EMEA.
Just good to mention that. I think we saw a retention rate slightly below 93% in EMEA in Q4 versus a retention rate slightly above 94% in the Americas in Q4. It does bounce around quarter-to-quarter, but generally, we've seen a higher retention rate in the Americas for the last couple of years, and I think that is a reflection of those dynamics that I've alluded to in the past around some of the pressures on asset managers there, some of the M&A transactions that have occurred. I'd say we're not expecting any pickup in the future. As I alluded to, if anything, we're seeing some improvement in client dynamics on the margin.
But I would say we're generally seeing a fairly consistent dynamic on the EMEA front. And that lower retention rate actually, we see it across product lines other than S&C. So Sustainability and Climate does have a higher retention rate in EMEA versus the Americas. But outside of that, we see a slightly lower retention rate in EMEA versus the Americas.
So I'd say no notable change in dynamics, if anything, slight improvement on that front.
And our next question comes from the line of Jason Haas from Wells Fargo.
I'm curious if you could help reiterate what's driving the strength in index recurring subscription revenue outside of asset managers. Is there any way to help like stack rank what those drivers are and just your level of confidence in those continuing?
Sure. Yes, it is multifaceted. But at the highest level, we are seeing a move in the investment industry, and this is one of the most powerful trends impacting the investment industry is a move towards personalization, customization, customized outcomes, custom portfolios. And index is a very efficient and effective mechanism to reflect a specific investment view, investment objective or a strategy that an investment industry participant has.
And so that is underlying the opportunities we see across the new products we're releasing, existing products that we have as well as the client segments that we're going after. Maybe to tackle your question along client segment lines, our highest growth client segment has been and in the fourth quarter was hedge funds. You've heard us talk a lot about the trading ecosystem and opportunity with hedge funds, broker-dealers, trading firms. That growth is being fueled by their thirst for content.
That's content to help them better understand markets better, better understand our indexes. They are increasingly looking for more content sets that we're actively releasing that ultimately help them navigate the markets and capitalize on opportunities more effectively. And so we saw 19% growth with hedge funds in the fourth quarter. We saw 10% growth with broker-dealers.
And related to that, we see broker-dealers developing things like over-the-counter derivatives, index-linked swaps, structured products as tools to help their clients, whether those are institutions or even high net worth individuals achieve specific investment objectives and risk and return and exposure objectives across their portfolio. And then even on asset managers and asset owners, when you look at the growth we've seen there, it is -- and the growth is, I think, 8% on both asset managers and asset owners and index. It is licensing more content from us across more parts of their organization and more use cases, and they are just finding more utility in the breadth of content and tools that we are providing on the index front that enable them to achieve their specific objectives via index portfolios.
And so I'd say broadly, it's being fueled by this need and demand for custom outcomes, we're feeding that with our existing Index IP, but also more and more custom indexes. Henry alluded to some of the new capabilities that we are releasing now and on the verge of releasing over the coming quarters, things like our Basket Builder, advancements on the custom index front that allow clients to actually directly interact with and back test portfolios and build their outcomes. We think that's going to unlock massive opportunities. So listen, in the near term, we're fueling the growth, you're seeing nice growth, and we have been for several years with the trading ecosystem buying more content, but we're seeing elevated growth and enhancing opportunities across all parts of the investment ecosystem to use our index content.
So I'd say it's a very compelling opportunity and part of the reason we remain so bullish and excited about the future.
And our final question for today comes from the line of Alex Kramm from UBS.
Sounded like you wanted some follow-ups, so hear this. Now this is a quick one, and it's actually a follow-up to my earlier question. I think Henry suggested that you are having a little bit more pricing power as the environment has gotten better. So maybe for you, Andy, any more meat you can put around this?
I think in the past, you've talked about contribution from pricing, et cetera. So maybe a little bit more in terms of 2026, what are you expecting across the different segments?
Yes. I would say, generally, the contribution from price increase has been relatively stable. There are puts and takes across the business based on innovations, enhancements we make to existing services, client health and usage of our tools. And as I've alluded to before, there are certain areas or Henry talked about it in areas like S&C where the health does vary in different geographies.
But overall, we've seen a relatively stable contribution from price increases. As you're asking about, and I think I alluded to this back in December, and we've mentioned before, the enhancements we are making on many fronts, we are monetizing through price increases. And so that's something that's not only supporting up sales, but price increases. So I would say there's some nice sustainability and durability to our ability to continue to increase price because we are significantly enhancing the value that our clients get from our tools.
And this is an area where AI is particularly exciting, where it's allowing our clients to do more with the services we provide and be more efficient in how they operate. And those should allow us to continue to unlock commercial value through price increases over time.
And I'd now like to hand the program back to Henry Fernandez, Chairman and CEO, for any further remarks.
So thank you, everyone, for joining us today. As we have described this morning, MSCI's all-weather franchise helped us complete another strong year of underlying business performance and attractive margins. We are also building momentum in the company in terms of creatively and aggressively selling across all client segments what we currently have. And the new product machine and the new innovation mode of MSCI is getting into high gear, and that will help us continue the momentum that we have generated in the last 2 quarters.
It feels like we kind of bottom out in the second quarter of last year. Obviously, too early to tell at this point, but we feel pretty confident and pretty encouraged by the pace of innovation, the pace of selling, the dialogue with clients, the market drop and for sure, the level of innovation and product launches that we are achieving. I'd like to take this opportunity one more time to thank my long-time friend and business partner, Baer. MSCI would not be what it is today without Baer, your contributions, your leadership, your dedication, your owner-operator mentality.
We wish you great happiness and fulfillment and good health in your retirement. And we, for sure, will be taking care of your retirement dollars here and make them multiply. So with that, again, I'd like to thank everyone.
And thank you, Henry, for your partnership, an incredible leadership, which I'm very confident will continue.
Thank you. Thank you all.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.