Morningstar’s CEO Kunal Kapoor on Private Assets and ‘Extracting Gold’

Morningstar’s CEO Kunal Kapoor has come a long way since he started at the company as a data analyst in 1997, when he compiled data on mutual funds — sometimes with the help of a fax machine. 

Today, the Chicago-based firm has become one of the premier data providers on the planet and even offers indexed products, technology and robo-advice for retirement savers. “My job was basically entering data,” he said. “Believe it or not, at that time, it was like extracting gold.” The problem was a lack of transparency around mutual funds, where even compiling information from public documents, like yields and total net assets from fund companies, was a challenge. “Today, we sort of take it for granted, which is awesome.”

Over the past eight years at the helm, Kapoor has helped the company expand its workforce to over 10,000 employees and boost its stock price more than threefold. Next up is tackling the private marketplace and creating a “common language” for advisors and investors to research both public and private investments using the same yardstick. “The private equity and private credit industry is not ready for that level of transparency, even as they have an interest in reaching investors” he said. “Ultimately, they are going to come around to the view that they have to make it simpler.”

Kapoor chatted with Advisor Upside during Morningstar’s Investment Conference held annually in Chicago. 

What’s your take on the massive public-private market convergence?

The public markets will remain the mainstay for most investors. [Private markets] have to adopt a framework that’ll allow for easier transactions and for lower costs. Do I think what exists today for advisors is best of class? No. Do I think that because advisors are starting to get more heavily involved in the space, it’s going to lead to better products, and lower-cost products, and more transparency? Yes.

It’s a journey, as with all things. What shouldn’t be lost is that there’s a really important reason why it’s happening: The number of companies that are private has increased. The amount of debt being issued in private markets — outside of the money center banks — is increasing, and so as an investor, you have some clear ability to think about that in terms of how you’re building exposure to your portfolio. 

The truth is more Americans than ever work for companies that are backed by PE. And so, they’re partly more familiar, and want to invest in these companies, because they’re part of that ecosystem. It used to be that not everybody would get equity and get to participate in its success, but that model has been changing.

How should advisors be thinking about deploying these funds in client portfolios?

Let’s think about it in the context of your 401(k) or mine. Those are elongated assets that are unlikely to get touched for an extended period. So I would say that you could have a higher exposure in that type of vehicle. That’s what all the non-profits and universities and endowments do as well, right? Those are long-dated assets. For shorter-term liquidity needs, let’s say our emergency six-month fund, it shouldn’t have any assets because you should not have any volatile assets in those. So it’s thinking about that scale.

The other thing I would just point out is this is new and the lack of liquidity is something that investors have to take into consideration. For investors or advisors who’ve never been in this space, I do think that inching into it is really important, versus kind of plunging. You really need to understand how your clients are going to react to having something that does not have immediate liquidity available to them.

What’s one issue that’s not getting enough attention?

One thing that doesn’t get talked about enough is that returns have been incredibly strong for the past two to three decades — and that’s led to easier conversations with clients. It’s also led to easier prospecting and it’s largely led to growth in assets. Our data would suggest, and our forecast suggests, that market returns in most asset classes will moderate in the years ahead. I think that is a real challenge, and it’s partly because the belief has been out there for a while, but the reality is, the markets have continued to fight the odds. So it’s easy to take it with a grain of salt, I guess. 

But it’s always good to be thoughtful around: What if returns are not what they were, how would you as an advisor run your business, manage your clients and prospect for new clients in that type of environment? We’ve just had such a big run, but the long and short of it is, if you believe in long-term market averages, the US has been above those averages for so long. And there have been many reasons for that, including a period of extended low interest rates. Growth and profits in some companies have hit extraordinary levels, and I think there’s just a question about whether they will kind of normalize to historical levels. It’s our belief that they will.