State Street's private-credit ETF receives lukewarm response

State Street Corp. and Apollo Global Management Inc.’s hotly anticipated private credit exchange-traded fund has been met with muted demand so far from investors.

The SPDR SSGA Apollo IG Public & Private Credit ETF, which trades under the ticker PRIV, has posted just two days of net inflows totaling just $5 million since its Feb. 27 launch, data compiled by Bloomberg shows.

While the launch came amid a big selloff across risky assets, there are existential reasons for the less-than-warm welcome. Chief among them: a wary Securities and Exchange Commission, which took the unusual step of sending a strongly worded letter post-launch, listing concerns over the fund’s liquidity, valuation and even its name.

While the firms have since responded, investor concerns echo those of the SEC: how will inherently illiquid assets behave in a fund wrapper that trades continuously on a public stock exchange? Given that PRIV is the first of its kind, investors appear to be waiting for that answer.

All in, the ETF has roughly $55 million in assets thanks to initial funding that it started trading with and may yet grab inflows in the event broader risk sentiment returns, particularly for alternative assets. The sheer fact that the novel product is trading may prove an encouraging sign for issuers, who are looking to launch strategies with similarly innovative structures. But asset allocators are holding tight, for now. 

“Investors justifiably are cautious because the whole essence of it is counterintuitive, that some third of the portfolio will be private — i.e. illiquid — but it will have all-day liquidity. Not just daily liquidity, but all-day liquidity,” Marina Gross, the head of Natixis Investment Managers Solutions, said at a media roundtable last week. “I wouldn’t go near it for now. I would watch it very closely and very carefully.”

State Street Global Advisors’ Chief Business Officer Anna Paglia said that getting additional questions from the SEC post-launch “is not unique — it happens from time to time.” She pointed out that the filing for the fund had been submitted some five months prior to its debut, suggesting a “very healthy dialog with the SEC” that constituted multiple rounds of feedback from the regulators, which, she says, State Street then addressed. 

“We thought the process had concluded, it had not. We got the new comments and we answered those comments within 24 hours,” she said on Thursday on Bloomberg TV. “More drama than was warranted was created in the market.”

The SEC requires that ETFs cap investments deemed illiquid at 15% of the portfolio — a bucket which includes private assets. However, PRIV suggests it could devote as much as 35% of its holdings to private credit, with a pledge from Apollo to originate a portion of the investments while also providing daily bids and price data.

Despite Apollo’s commitment, questions remain over how the assets within the portfolio will be valued and how day-to-day trading will work. 

“The hesitation that I would have, at least initially, which is why I think it’s prudent to take a wait-and-see approach, is the mismatch in liquidity that you have with the ETF being instantaneously liquid and underlying not being liquid,” said Garrett Aird, vice president of investment management and research at Northwestern Mutual.

Private credit has boomed over the past several years mostly through direct corporate lending. As institutional investment has plateaued, firms have raced to draw wealth from individual investors and offer them exposure. The Bank for International Settlements warned in a report this week that the push for retail cash could create vulnerabilities within private credit due to the liquidity mismatches. 

For Paglia, the last few weeks have been spent fielding questions about PRIV. It’s normal for investors to wait until a new ETF has a track record before jumping in, she said in a separate interview.

“We’re having a number of meetings about PRIV, and I think the wait-and-see approach is what we always expect when we launch active funds, because they are not as transparent and predictable as passive funds,” Paglia said. “This is very much what we believed would happen, but there is a lot of interest in the fund.”

Bain & Co. forecast last year that retail will be the fastest-growing source of capital for private assets through 2032. But it’s an open question whether ETFs will be a significant funnel for that demand.

Blackstone Inc. and Blue Owl Capital Inc. are both launching vehicles dedicated to private credit. But instead of ETFs, both have opted for interval funds, which offer quarterly withdrawals rather than intraday liquidity. Blackstone’s fund is planning to invest at least 80% of its assets in private credit.

“We do a fair amount of private credit for our clients — it is a very crowded space right now with just about every asset manager having or rolling something out. Literally daily,” said Chuck Cumello, the chief executive officer at Essex Financial Services. 

“We have been investing in private credit for a few years. As of yet, we have not seen any client demand for this type of ETF,” he said, referencing the State Street fund.