(Bloomberg) — A high-stakes race is taking shape among top money managers, including BlackRock Inc . and Invesco Ltd., to combine Wall Street's trendiest investment vehicle with its fastest-growing asset class.
The firms are among those signaling they want to offer access to private markets through ETFs, a link with the potential to open up the closed world to investors of all stripes. It can also channel new money into an asset class it tries to hold the living boom after years of terrible expansion.
Challenges? Even these investment giants will have to overcome a number of technical and regulatory hurdles before they can squeeze companies like real estate and pre-publics into the famous ETF wrapper.
“It's not going to be as linear as, well, you go buy a bunch of buildings and put them into an ETF,” said Doug Sharp, Invesco's head of Americas and EMEA, who confirmed his firm is exploring the idea. “I would expect innovation in the space, but the path there is a little less clear.”
With private markets now valued more than $13 trillion and billions pouring into ETFs every month at the expense of of old-fashioned mutual funds, the motivation to figure it out is strong.
BlackRock's $3.2 billion deal The acquisition of Preqin, an alternative asset data provider, is part of the firm's ambitions to “index private markets,” Chief Executive Larry Fink said after the acquisition was announced in early July. The world's largest money manager believes it can bring the principles of indexing and iShares — its ETF arm — to the industry, Fink said. Preqin competes with Bloomberg LP, the parent of Bloomberg News.
While it may not happen in the near term, “the ETF-like wrapper for private assets could be very important to investors in the future,” Samara Cohen, BlackRock's CIO of ETF and index investing, told Bloomberg TV. IQ ETF this week. “We've been thinking a lot about expanding our ETF and indexing capabilities that we've built in the private markets.”
Meanwhile, Apollo Global Management Inc., a $671 billion alternative asset managerhe said it plans to sell private loans through retail channels including ETFs. Goldman Sachs Asset Management says it is looking at how a private-asset ETF might work.
The big challenge is detecting the liquidity mismatch between the assets and the vehicle. As listed securities, ETFs change hands every second of the day in the cash market, in extended trading and increasingly even overnight. In contrast, private equity is notorious for barely trading.
“By definition, alternatives are illiquid and ETFs, the whole point of it is liquid,” said Marc Nachmann, global head of assets and wealth management at Goldman Asset. “I think a lot of people, including us, are thinking about how this might work.”
While the resilience of fixed-income ETFs during the Covid crash eased fears over funds holding less liquid assets, the scale of the mismatch with private investments would have little precedent.
The Securities and Exchange Commission imposes a 15% limit on open-end funds that hold illiquid investments, defined as those that cannot be sold in seven days “without significantly changing the market value of the investment.” This effectively limits an ETF's direct private holdings, meaning it can currently only hold a small amount of unlisted exposure.
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One possible solution to the mismatch is through so-called synthetic exposure, where a fund would not actually hold private assets, but would contain swaps written against a portfolio of private equity.
“At the end of the day, the exchange still has to be valued based on some kind of brand every day,” said Dave Nadig, an industry veteran who says he's had countless conversations over the past two years with firms looking to create an ETF. of private assets. “That makes this extremely slow.”
Another alternative would be to try to mimic the performance of private asset investments in a so-called liquid alternative ETF. These funds, known as liquid alts, use tactics such as leverage, short selling and derivatives to strategies are repeatedoften trying to adopt popular hedge fund styles.
Their running costs and checkered performance have drawn criticism, and there is a big question as to whether the private markets – where valuations are often updated only quarterly – have enough data to create a sustainable liquefaction strategy. However, they have proven a powerful tool for opening up sophisticated approaches that were previously off-limits to most investors – much like unlisted assets.
“The retail community has been excluded from generating private asset wealth,” said Reggie Browne, head of ETF trading at trader GTS. The industry veteran cites the example of Uber Technologies Inc., which grew tremendously in the years before it went public. “All that market cap expansion was not available for retail,” he said.
There are currently at least 15 ETFs seeking to provide U.S. private market exposure, according to JPMorgan Chase & Co., but they mostly do so indirectly, targeting things like initial public offerings and buyout vehicles. special.
Underscoring this trend, KraneShares in July unveiled a new fund that will track an index that provides private equity performance. But this will be achieved by using listed small- and mid-cap stocks that the issuer sees as similar to the type of companies in the buyout funds.
Read more: The creative magic of private equity is hiding the signs of danger
Cynics see another motivation behind the race to allow individual investors to join the private market party.
With interest rates at their highest level in years, pressure has been building for buyout firms as they face high borrowing costs and struggle to exit assets at suitable prices. Against this backdrop, private equity fundraising is on track for one 20% drop this year, according to S&P Global Market Intelligence and Preqin.
Some market players are afraid trying to help individual investors to enter the industry are little more than an attempt to keep the boom alive.
“A lot of the money that's in the big institutional hedge funds and venture capital funds is locked up,” Nadig said. “The whole idea of exposing them to ETFs is mainly about figuring out how to get all this private capital into the retail market so that institutions can get back into the game of financing new companies. .”
However, with the amount of cash in private assets projected in total almost 20 trillion dollars by 2028, according to PitchBook, the endgame is surely imminent.
Despite various practical challenges, the ETF industry has eventually managed to squeeze everything from collateralized loan obligations to complex tax efficient strategies in the wrapper. Issuers even successfully launched single-stock products in the market vocal opposition from the SEC.
“If it can be done, I have faith in the ETF market,” said Todd Rosenbluth, head of research at index and analytics firm VettaFi. Bloomberg TV's IQ ETF.