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Wall Street’s top securities regulator has raised concerns about a private credit exchange traded fund from State Street and Apollo that began trading on Thursday, in a blow to the two Wall Street groups.
The fund is designed to open private credit, an investment class that has largely been the purview of institutional investors, to retail investors. Its success is being closely watched by Wall Street as rivals look to launch competing funds.
The Securities and Exchange Commission questioned how the State Street fund — known as the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) — would maintain liquidity and value private debt, according to a letter sent to the fund and made public through a regulatory filing.
State Street, one of the largest ETF issuers in the US, is sponsoring the fund, while Apollo will source private credit investments for the product. Apollo has also inked an agreement to shore up liquidity on the private credit side of the fund’s portfolio, which also includes public debt.
The regulator said there were “significant remaining outstanding issues”.
Private credit has boomed in recent years as institutional investors, including pension plans and sovereign wealth funds, have flocked to the asset class, which generally offers higher yields than traditional public credit.
But the bonds and loans have historically been considered too illiquid to belong in ETFs, which trade throughout the day on exchanges such as stocks.
Apollo has a deal with the fund to provide intraday bids on all Apollo private credit offerings the ETF holds, allowing for daily liquidity.
The SEC cast doubt on the arrangement. “We do not believe, however, that it would be sufficient for purposes of [federal securities law] to rely solely on bids from Apollo,” it said.
SEC staff also expressed concerns that the use of “Apollo” in the fund name could be misleading and asked for the ETF to be renamed “to reflect the limited nature of Apollo’s relationship with the fund”.
Private credit holdings are expected to make up 10 to 35 per cent of the fund’s portfolio, which also contains corporate debt.
Regulations limit the value of illiquid holdings in an ETF to 15 per cent of its assets, a measure intended to safeguard investors if a fund has to liquidate holdings to meet redemptions.
Fund data posted on Thursday showed the new ETF held a high cash reserve and bonds from JPMorgan Chase and Amazon, as well as private financings Apollo had negotiated with Intel and Air France.
The new ETF amounts to “a higher-yielding version of a typical investment-grade bond ETF with unique structural risks”, said Bryan Armour, director of passive strategies research at Morningstar.
“The main concern for investors is that Apollo plays the role of buyer, seller and pricing agent for the private credit in [the ETF], which could result in conflicts of interest,” Armour added.
“Apollo has an unknown daily limit on how much private credit they would buy back, which raises concerns with how the ETF would function during heavy redemptions.”
A State Street spokesman said the group had “received the comments and are responding”. Apollo declined to comment.
https://www.ft.com/content/6ae31185-f611-4ffd-9a59-00cd0b392161
