SSGA and Apollo break new ground with launch of private credit ETF

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State Street Global Advisors and Apollo Global Management have launched a private credit ETF, paving the way for the launch of more so-called ‘40 Act funds investing beyond the 15 per cent cap on illiquid holdings.

The registration statement for the SPDR SSGA Apollo IG Public & Private Credit ETF, trading under the ticker PRIV, was made effective on Wednesday, listing the expense ratio at 0.70 per cent.

“It’s a wide new ETF world out there,” said Brian Moriarty, a Morningstar principal for fixed-income strategies, in a note.

First proposed in September, the fund will be the first to feature more than marginal exposure to private credit within an ETF wrapper — giving SSGA pole position in a fiercely contested new ‘40 Act product frontier.

This article was previously published by Ignites, a title owned by the FT Group.

Though open-ended funds are bound by US Securities and Exchange Commission rules to limiting illiquid holdings to 15 per cent of assets, the new ETF will breach that limit by stretching the definition of liquidity.

Apollo will source SSGA with private credit assets while also agreeing to buy the assets from the fund up to an undefined daily limit. In that way, the Apollo-sourced assets will comply with the SEC’s definition of liquid investments: any holdings that the fund “reasonably expects” can be sold under current market conditions within seven calendar days “without significantly changing the market value of the investment.”

SSGA’s filing projects that the private credit exposures would “generally range between 10-35 per cent of the fund’s portfolio” but may exceed even 35 per cent.

“The percentage allocation of fund investments to private credit, including AOS [Apollo-sourced] Investments will be determined solely in the discretion of the portfolio managers of the fund and will vary depending on several factors, including the portfolio managers’ viewpoints regarding available AOS Investments or other private credit instruments, market conditions, credit analysis and other factors the portfolio managers deem to be relevant at any given time,” the filing said.

In addition to debt securities, the fund also intends to hold private funds, interval funds and business development companies.

The open-endedness of Apollo’s liquidity facility potentially leaves the fund vulnerable to pricing anomalies and trading hiccups. The filing acknowledges as much, warning “if Apollo is unable to meet its contractual obligation to provide firm bids for AOS Investments and there are no other counterparties willing to purchase AOS Investments, the fund’s assets that were deemed liquid by the adviser may become illiquid”.

Morningstar analysts have also flagged concerns over Apollo’s compensation for the fund services, cautioning that the filing did not address the possibility of self-dealing.

The SEC approval all but guaranteed copycat rollouts, Moriarty said in the note.

“This represents a seismic shift,” he said. “It opens the door to similar liquidity facility arrangements between advisers and liquidity providers, which could facilitate a proliferation of public/private hybrid portfolios in mutual funds and ETFs.”

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.