(Bloomberg) — In the race to open up the multitrillion-dollar private-asset market to retail investors, Apollo Global Management and State Street Global Advisors appear to have jumped ahead of rivals with their breakthrough PLAN for a new ETF loan.
Now, industry participants are left wondering exactly how the institutional big guns will successfully marry famously illiquid properties with a marketable investment for the masses.
The two firms filed in early September to launch an actively managed exchange-traded fund that will hold 80% of net assets in investment-grade securities — both publicly traded debt and private credit — while it will share up to 20% towards the high level. yield bonds.
The fund, called the SPDR SSGA Apollo IG Public and Private Credit ETF, still needs to win US regulatory approval. However, if successful, it would pave the way for the release of billions in an already burgeoning ETF universe and lead to a slew of copycat products. In their joint statement announcing the plan, State Street executive Anna Paglia described the effort as a way to “democratize access” to a corner of the market that had largely been open only to big players or high-net-worth investors. high net.
“Whoever can bridge the gap between all that private stuff and the retail investor is bound to have a good time,” Bloomberg Intelligence's Eric Balchunas told Bloomberg. trillions podcast.
However, for that to happen, the two investment titans will need to prove to regulators that the new trading strategy behind their plan can work smoothly in practice amid a plethora of market risks and that it meets guidelines of the Securities and Exchange Commission.
A major obstacle lies in reconciling the mismatch in asset and vehicle composition. As listed securities, ETFs change hands every second of the day in the cash market and in extended trading. In contrast, private investments are notorious for changing hands. This raises questions about how the mechanics of the fund would work—especially in the event of a wave of buybacks in the midst of a major sales or credit crunch—and how securities that are rarely, if ever, traded can be valued objectively. right.
“Liquidity is an issue and the ETF structure, by design, is a very liquid structure — the whole point of the ETF,” said Cinthia Murphy, investment strategist at data provider VettaFi. Prime ETF podcast of the challenges of getting such funding off the ground. “It's really hard to have that creation-redemption mechanism that makes the ETF structure the powerful tool that's working properly when you're navigating securities that aren't traded at all.”
Spokesmen for State Street and Apollo said they are unable for regulatory reasons to comment on their pending application. But the firms' submission outlines the general framework for overcoming current regulatory restrictions around placing illiquid assets in an ETF structure.
State Street and Apollo are betting that their plan to launch an ETF that includes private debt will pass muster with the SEC.
According to their plan, the fund would invest in private credit through debt taken from Apollo as well as other instruments. Apollo would serve as a liquidity provider for the debt it takes on, contractually agreeing to “provide intraday firm offers” for the investments. And it would offer to buy them from the fund at State Street's discretion, subject to an as-yet-unspecified daily limit.
In principle, Apollo's agreement to bid on the private debt it receives would allow that portion to be considered liquid. And the firm is separately involved in efforts to build a private credit trading desk, part of moves by some big players to create markets in debt so it's easier to value, buy and sell.
But industry experts still see potential problems with this type of structure, including Apollo's role and how ratings on some of the private debt will be set.
“The caveat is that we don't build these products for an average day, we build these products for bad days,” said Dave Nadig, an ETF industry veteran.
Read more: Apollo will build the Private Credit Trading Desk
The fund's prospectus cites the risk that Apollo is unable to meet its obligation to make offers for the investments it has received, in which case they may be considered illiquid. This is important because US regulations only allow open-ended funds to hold 15% of their holdings in such assets.
There are also potential challenges around Apollo's acquisition cap, a topic that was raised in one the last report by Morningstar Inc. analysts. Brian Moriarty and Ryan Jackson. That is, they raise questions about how the fund would perform in times of market stress. Morningstar envisions a scenario in which the ETF sees outflows, but Apollo's daily limit — the return limit — isn't big enough to keep up with the buybacks.
“This could force State Street to sell more liquid public securities first, leaving the ETF with more illiquid private credit instruments as a percentage of assets and increasing the risks of further liquidity crises,” the analysts wrote. Morningstar. “Much depends on Apollo's daily liquidity cap and its ability to satisfy it as the ETF grows.”
Read more on private credit ETFs:
Unpacking Apollo's Proposed Private Credit Offering: The IQ ETF
Citi, Apollo Join Forces in $25 Billion Private Loan
The listing of a second private loan from ETF lands within days from Apollo's
Of course, the ETF industry has had success finding ways to package hard-to-trade assets — like fixed income, gold or Bitcoin — in an ETF wrapper, all without major problems, Bloomberg Intelligence's Balchunas said. Additionally, State Street has a solid track record within the space, and it's possible that more information will still emerge about how the fund would perform.
“There haven't been many situations where ETFs haven't served their investors well,” he said. “The trust and goodwill from the industry over the years, and this intelligence and adaptability of users — I think they're ready for it, and I think they're going to go with it.”
But Nadig foresees a long road ahead of any potential launch.
“They put up this file and now the staff is reviewing it within the SEC, and then the staff will send 400 questions back to them,” he said.