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There’s a new ETF in town. SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) will trade Thursday at the NYSE.
This fund intends to invest at least 80% of its net assets in investment grade debt securities, including a combination of public credit and private credit. What’s surprising is that there is a significant component of private credit in the ETF wrapper. Because private credit is illiquid, it has been a problem getting this in an ETF wrapper, since ETFs need liquidity.
They are trying to solve this problem by having Apollo provide credit assets and they will purchase those investments back if need be.
ETFs have owned illiquid investments in the past (there are bank loan ETFs that have illiquid investments) so this is not the first time this issue has been addressed. But Wall Street is eager to provide access to private equity and credit to the masses, and ETFs are the obvious wrapper.
Normally, ETFs are only allowed to own illiquid investments up to 15% of the fund, but the SEC says that in this case private credit can range between 10% and 35%, but can be above or below that.
This filing has been controversial. One early concern was that if Apollo is the only firm providing the liquidity, it naturally raises questions about what type of pricing State Street will get. However, State Street apparently can source from other firms if it can get better prices.
Another issue: Apollo is required to buy back the loans, but only up to a daily limit, and it’s not clear what happens after that. It’s not clear if the market makers would accept private credit instruments for redemption.
Bottom line: This is a groundbreaking but very complicated ETF. It will be closely monitored for liquidity.
Monday update:
An update on a story we reported on last week. The SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) launched last Thursday. It allowed retail investors to buy into private credit assets. Late on that day the SEC sent a letter to the company saying there was “significant remaining outstanding issues” and listed worries centered on the fund’s liquidity, its use of the name Apollo in the title and its ability to comply with valuation rules. State Street responded Friday night saying they would revise the name of the fund as soon as practicable (presumably removing Apollo’s name), clarified that the fund’s illiquid products will not be exclusively tied to Apollo and that other broker dealers can provide quotes, and that the fund’s NAV will be calculated on a daily basis.
State Street told CNBC they would have no further comments at this time.
It is unusual for a fund to become effective and then have the SEC raise concerns after the fact. Typically, a fund can become effective after 75 days unless the SEC raises objections. In this case, there were several extensions, but it is unclear why the SEC raised additional questions after the fund had begun trading.
