A new exchange-traded fund (ETF) is making its debut. The SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) is set to begin trading on the New York Stock Exchange this Thursday. This innovative fund will dedicate at least 80% of its assets to investment-grade debt securities, encompassing both public and private credit markets.
Bridging Public and Private Credit
One of the most striking aspects of this ETF is its significant allocation to private credit, a typically illiquid asset class. Historically, incorporating private credit into an ETF structure has been challenging due to liquidity constraints. However, this fund seeks to navigate the issue by leveraging Apollo’s credit assets, with Apollo repurchasing the investments when necessary.
Addressing Liquidity Concerns
ETFs holding illiquid assets aren’t new—bank loan ETFs have dealt with similar challenges in the past. But Wall Street’s growing interest in democratizing access to private equity and credit makes PRIV a particularly important development.
Normally, SEC regulations limit ETFs to allocating no more than 15% of their holdings to illiquid investments. However, the SEC has permitted this ETF’s private credit exposure to range from 10% to 35%, with potential variations beyond that range.
Potential Risks and Market Implications
The introduction of this fund has sparked debate. One primary concern is Apollo’s role as the primary liquidity provider. If the firm is the sole entity repurchasing these assets, questions arise about whether State Street can secure competitive pricing. Fortunately, the ETF’s structure allows State Street to source from alternative providers if better pricing becomes available.
Another challenge revolves around Apollo’s obligation to buy back loans—this commitment has a daily limit, and the impact beyond that threshold remains uncertain. Additionally, it’s unclear whether market makers will accept private credit instruments for redemption.
Market Impact and Future Outlook
The launch of PRIV represents a significant milestone for ETFs, introducing a hybridized approach to public and private credit investing. While the fund offers new opportunities, its success will hinge on liquidity management and execution.
Investors and analysts will closely monitor how the ETF handles redemptions and the extent to which it influences broader ETF market dynamics. If successful, this could pave the way for similar structures in the future, further expanding market access to traditionally illiquid asset classes.
