State Street stole a lead on rivals with new ETF, but SEC is concerned

A new exchange-traded fund is sparking interest within the industry for its novel approach to offering exposure to private markets for retail investors.

State Street Global Advisors has launched its SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) in a move that may gain a first-mover advantage, by addressing the liquidity issues that have made it challenging to provide access to private credit investment in an ETF wrapper.

The new fund is managed by State Street’s active fixed income team and debuted Thursday on the New York Stock Exchange. Key to its difference is the firm’s partnership with Apollo Global Management. The fund invests in both public and private investment-grade credit and includes assets originated by Apollo.

Apollo’s guarantee to provide assets for the fund and to buy them back when requested to do so by State Street appears to addresses the liquidity concerns of investors, the industry, and the SEC, regarding private credit funds.

But in a letter to State Street after the fund launched, SEC associate director Brent J. Fields expresses concern about the fund’s liquidity, name (“the use of Apollo in the fund’s name is misleading”), and its ability to comply with valuation rules.

The agreement with Apollo seemingly enables the fund’s share of private credit investments to be above the SEC’s 15% limit on illiquid assets and is likely to fall within a 10-35% range.  

“Historically, the ETF vehicle has been used to unlock market opportunities for all investors, no matter how big or small. Thanks to ETFs, all investors have transparent access to traditionally less-liquid segments of the markets,” said Anna Paglia, chief business officer at State Street Global Advisors. “We have worked with Apollo to provide a liquidity solution within PRIV and PRIV continues the mission of democratizing access to private markets.”

Two other funds launched last year with more limited exposure to the private credit market via collateralized loan obligations: BondBloxx Private Credit CLO ETF (PCMM) and the Virtus SEIX AAA Private Credit CLO ETF (PCLO).

Morningstar principal, fixed income strategies, Brian Moriarty, believes PRIV’s launch will spark similar launches.

“This represents a seismic shift. It opens the door to similar liquidity facility arrangements between advisors and liquidity providers, which could facilitate a proliferation of public/private hybrid portfolios in mutual funds and ETFs,” he wrote in a blog, while raising concern that the undefined daily limit of the Apollo liquidity guardrail could cause issues if redemptions exceed it and the fund does not have enough public securities to meet demand quickly.

Meanwhile, one asset manager has ruled itself out of the private credit ETF market any time soon.

Ares Management’s Kipp deVeer, who was recently appointed co-president, told Bloomberg that the firm “doesn’t have anything in the works right now” regarding this type of fund, preferring to diversify its distribution through wealth channels and including non-traded REITS and BDCs.