The private credit ETF race is heating up

The race among asset managers to offer exposure to private markets, traditionally reserved for institutional investors, through the popular ETF structure now has three official contenders.

Virtus and BondBloxx have filed to launch private credit ETFs, joining State Street Global Advisors in an escalating contest to bring private market access to retail investors.

Virtus and BondBloxx filed their applications this month, with BondBloxx submitting its filing on September 12, a day ahead of Virtus. Both funds are designed to focus on credit collateralized loan obligations, predominantly backed by loans to private companies.

The two firms' submissions comes just days after SSGA filed a prospectus on September 10, signaling its collaboration with Apollo Global Management on a broader private credit fund that will invest in private funds, interval funds, and business development companies.

As reported by the Financial Times, the filings reflect a growing interest in '40 Act products that offer private market exposure through ETFs, amid a growing interest among retail investors to access private markets.

“It has paid to be first with ETF innovations in the past,” Morningstar analysts Brian Moriarty and Ryan Jackson said in a research note on the SSGA-Apollo filing. The first fund to market could benefit from significant inflows and establish a lead in this emerging sector.

The potential prize is substantial, as retail investors have significantly increased their allocations to private markets. According to Morgan Stanley and Oliver Wyman, retail wealth investors allocated $2.3 trillion to private markets in 2020, a figure expected to more than double to $5.1 trillion by 2025.

However, offering private market access through ETFs presents technical and regulatory challenges. Private investments are typically illiquid, while ETFs are traded throughout the day. "By definition, alternatives are illiquid, and ETFs, the whole core to it is liquid,” Marc Nachmann, Goldman Sachs’ global head of asset and wealth management, told Bloomberg in July. The liquidity mismatch could pose hurdles for firms looking to successfully launch these funds.

Meanwhile, some industry experts remain skeptical of these initiatives, suggesting that the rush to bring private markets to retail investors may be driven by buyout firms struggling with higher borrowing costs and limited exit opportunities.

"The whole idea of putting their exposure into ETFs is mostly about figuring out how to foist all of this private equity onto the retail market," ETF expert Dave Nadig said to Bloomberg.

But the near-term challenges in the private markets space could be just the prelude to a longer-term investment opportunity. In a report published last month, Bain & Company painted a bullish picture of the private markets, predicting a compound annual growth rate of 9 to 10 percent in private assets to reach $65 trillion by 2032.

"Wealth and asset managers are now favoring private markets because the business models that have dominated asset management for years have nearly run their course,” said Markus Habbel, global head of Bain’s wealth and asset management practice.

“Private assets constitute a much larger market than public assets and offer potentially higher yields, diversification, and in cases such as real estate—a hedge against inflation,” Habbel added.