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As was reported here last September, State Street Global Advisors (SSGA) and Apollo Global Management filed plans for the SPDR SSGA Apollo IG Public and Private Credit ETF – noteworthy in the dizzying world of ETF filings because the fund aims to be unique relative existing private credit products in fund form.
Advisors may want to take note because regulators approved the ETF and updated prospectus shows the ticker “PRIV” has been selected and that the fund will charge 0.70% per year, or $70 on a $10,000 stake. Those factors indicate launch could be imminent.
“The Fund intends to invest in private credit, which refers to a wide range of credit instruments, such as instruments that are directly originated, issued in private offerings, issued to private companies, and/or issued to borrowers by non-bank lenders (i.e., non-bank lending instruments), including asset-backed and corporate finance instruments sourced by Apollo (each, an “AOS Investment”),” according to the original filing. “The Fund can invest across numerous types of instruments, including but not limited to consumer finance, residential mortgage loans, commercial real estate, hard assets (through securitized loans), and financial assets.”
Why PRIV Is Pertinent
An official launch date for PRIV isn’t yet known, but the fund will come to market at a time when the universe of private credit ETFs, though still small, is increasing in terms of population.
It’s easy to understand why that’s the case and the factors explaining that ease also highlight why PRIV could be an example of a well-timed new ETF. First, private credit is an intriguing asset class to many clients and one that generates compelling levels of income. Second, PRIV could find success because it addresses some of the liquidity concerns associated with its underlying asset class.
“The ETF plans to overcome those concerns through a contractual agreement with Apollo, which will supply private-credit assets for the fund to buy and provide it with bids, or prices, on those same assets,” says Morningstar’s Brian Moriarty. “Apollo has further agreed to purchase those investments from the fund up to an undefined daily limit. In other words, Apollo is selling these instruments to the fund and promising to buy them back at the request of State Street.”
In plain English, the Securities and Exchange Commission (SEC) has a 15% limit on the amount of assets deemed illiquid a fund can hold, but because Apollo is pledging to buy such assets, PRIV earns a workaround where its percentage of illiquid assets can be as high as 35%. It remains to be seen if PRIV solves the liquidity issue that often surrounds private credit, but at the very least, the new ETF will employ a unique approach.
“In the case of this ETF, Apollo’s liquidity facility is subject to a daily limit, and this daily limit remains undefined; it’s possible the fund could have to meet way more redemptions in a day than the limit,” adds Moriarty. “That could force State Street to sell more-liquid public securities first, potentially leaving the ETF with more in illiquid private credit instruments as a percentage of assets and increasing the risks of a liquidity crunch.”
Other Potential Perks with PRIV
Liquidity concerns as they pertain to PRIV have already been highlighted in some corners and that’s in advance of the ETF coming to life. So if the issue is on the minds of critics, it should be a point of emphasis for SSGA as well.
Fortunately, SSGA isn’t solely reliant on Apollo to bid or ask for private credit assets on its behalf. The issuer can source those transactions via other parties and that could serve to further mitigate liquidity worries. Bottom line: PRIV is unique and will push some boundaries when it debuts, but it could also prove to have staying power.
“This is a groundbreaking proposal that could open the door for a multitude of copycat vehicles. But it remains to be seen how it works in practice, given the liquidity mismatch. It also remains to be seen how willing the market will be to accept illiquids in such a liquid wrapper,” concludes Moriarty.
Related: The Real Value of Financial Advisors: It’s More Than Just Advice