State Street Global Advisors (SSGA) and Apollo Global Management have partnered to create a groundbreaking investment product — the SPDR SSGA Apollo IG Public & Private Credit ETF (ticker: PRIV). This fund is setting a new precedent for ETFs by offering a significant exposure to private credit assets within an exchange-traded fund structure, an innovation that is gaining attention both within the financial industry and among investors. This launch is expected to pave the way for future funds to go beyond the traditional 15% cap on illiquid holdings in open-ended funds.
The PRIV ETF represents a bold step in bridging the gap between public and private market access. It brings private credit investments, which are traditionally illiquid and difficult for retail investors to access, into a much more accessible and liquid format. As a result, this ETF has the potential to reshape the way institutional and retail investors engage with the private credit market, which has historically been dominated by institutional investors and high-net-worth individuals.
Open-ended funds have long been constrained by U.S. Securities and Exchange Commission (SEC) rules that limit illiquid holdings to no more than 15% of a fund’s total assets. This regulatory requirement has posed a significant challenge for funds looking to include private credit in their portfolios, as these assets are often difficult to sell quickly or easily on the open market.
The new SSGA Apollo ETF breaks through this barrier by rethinking the definition of liquidity. Apollo Global Management sources private credit assets for the ETF, and the firm also commits to buying these assets from the fund up to a defined daily limit. This arrangement is crucial in ensuring that the private credit investments meet the SEC’s liquidity requirements, which stipulate that an asset must be able to be sold within seven calendar days without significantly impacting its market value.
While this structure is innovative, it is also highly complex and may raise concerns about the fund’s ability to maintain liquidity under stressed market conditions. The fund’s success will depend on Apollo’s ability to consistently fulfill its liquidity obligations and provide firm bids for private credit assets.
One of the key features of the PRIV ETF is its flexibility in private credit allocations. The fund’s prospectus indicates that the ETF will generally allocate between 10-35% of its assets to private credit, but it could exceed this range depending on market conditions, the availability of attractive investment opportunities, and the discretion of the portfolio managers.
This level of flexibility allows the fund to adjust its exposure to private credit based on market dynamics, offering both downside protection in volatile markets and the potential for enhanced returns when private credit opportunities are more favorable. The portfolio will also include traditional debt securities, interval funds, private funds, and business development companies, providing a well-rounded mix of assets.
In addition to its core private credit investments, the fund will be able to tap into a variety of asset classes, offering diversification that can help mitigate the risks traditionally associated with private credit investments. This makes the ETF an attractive option for investors looking to gain exposure to private credit while still maintaining a diversified portfolio.
Apollo’s involvement in the PRIV ETF extends beyond merely sourcing private credit assets. The firm has agreed to purchase these assets from the fund up to a certain daily limit, essentially acting as a liquidity provider. This arrangement allows the ETF to include more illiquid private credit assets without violating SEC regulations.
However, the success of this liquidity arrangement hinges on Apollo’s ability to consistently meet its obligations. If for any reason Apollo is unable to purchase the assets from the fund, the liquidity of these private credit assets could come into question, which could impact the fund’s overall valuation and its ability to meet redemption requests.
The fund’s prospectus acknowledges this risk, warning that if Apollo fails to provide firm bids for private credit investments, those assets may become illiquid, affecting the fund’s overall liquidity and potentially leading to pricing anomalies.
There are also concerns about potential conflicts of interest, as Apollo is both the source of the private credit assets and the liquidity provider. Analysts have pointed out that the fund’s filing does not clearly address whether Apollo’s dual role could lead to self-dealing, which could harm investors. Self-dealing could occur if Apollo prioritizes its own interests when purchasing assets from the fund, rather than adhering to the best interests of the ETF’s shareholders.
The issue of self-dealing is a complex one, and investors will need to monitor how the relationship between Apollo and the PRIV ETF evolves over time. The SEC will likely scrutinize this arrangement closely, given the potential risks it poses to the fund’s integrity and to investor confidence.
The PRIV ETF represents more than just a new product; it signals a broader shift in the investment landscape. If successful, this fund could usher in a new era of hybrid investment vehicles that combine the best of both public and private markets. By overcoming the traditional liquidity challenges associated with private credit, the ETF opens up new opportunities for retail investors and institutions alike.
Morningstar’s Brian Moriarty has referred to the launch as a “seismic shift” in the world of ETFs, suggesting that this could be just the beginning of a wave of similar products that blend private market assets with the public market liquidity of ETFs. In particular, the flexibility to include private credit in public market structures could lead to a proliferation of public-private hybrid portfolios in mutual funds and ETFs, fundamentally altering the way investors allocate capital.
If the PRIV ETF proves to be successful, it could encourage more asset managers to explore similar models. This would not only increase the availability of private credit investments but also expand the overall ETF market by incorporating more complex and less liquid assets.
For investors, the PRIV ETF represents a novel and potentially lucrative way to access private credit, a sector that has traditionally been out of reach for most retail investors. However, this new structure also comes with risks, including concerns about liquidity and the potential for conflicts of interest. Investors will need to weigh the benefits of diversification and private credit exposure against these potential risks.
The launch of the SPDR SSGA Apollo IG Public & Private Credit ETF marks a critical moment in the evolution of the ETF market. By pioneering the inclusion of private credit in an ETF structure, SSGA and Apollo have set the stage for future developments in the hybrid ETF space. While the fund offers new opportunities for diversification and access to private credit, it also introduces a set of risks and challenges that investors must carefully consider.
As other firms look to follow in SSGA and Apollo’s footsteps, this innovative product could lead to a new generation of ETFs that blend public and private market investments, offering a broader range of opportunities for investors. However, for the PRIV ETF to succeed, investors and regulators alike will need to ensure that its liquidity and conflict-of-interest risks are effectively managed.
