(This Feb. 27 story has been corrected to fix the surname of 'Kirsten Chang' in paragraphs 7 and 11)
By Suzanne McGee
NEW YORK (Reuters) - State Street (NYSE:STT) Global Advisors' much-anticipated private credit exchange-traded fund, developed with alternative investment firm Apollo Global Management (NYSE:APO), began trading on the New York Stock Exchange on Thursday.
The SPDR SSGA Apollo IG Public & Private Credit ETF is the first product offering retail investors direct access to a diversified portfolio of private credit assets.
"Having those private assets is fundamental to being able to build a healthy portfolio nowadays," said Michael Weisz, CEO of YieldStreet, a private market investment platform. Private credit has been an established asset class for at least 30 years, he added. "Now the ETF delivery mechanism allows ordinary investors to add it to their portfolios."
One of the hurdles confronting ETF providers seeking to build a private credit ETF is the limitation imposed by the U.S. Securities & Exchange Commission on the amount of illiquid assets any fund can hold. That threshold is set at 15%, but State Street said it may hold up to 35% of assets in private securities thanks to a backup liquidity agreement with Apollo.
That arrangement, said Brian Moriarty, an analyst with Morningstar, in a report published on Thursday, represents "a creative way around the SEC's definition of illiquid."
The final prospectus spelled out Apollo's role in originating the private credit the ETF will own, and its commitment to provide liquidity via firm bids for those assets. State Street's final revisions to that prospectus included adding the flexibility to source and trade with other buyers and sellers of private credit assets as well as Apollo.
"That seems to have been necessary to get the SEC to sign off on what remains a very complicated structure and one whose performance and liquidity will be very closely monitored," said Kirsten Chang, senior industry analyst at VettaFi.
The new ETF carries a 0.7% fee and traded little changed on Thursday, wrapping up its first day on the market down 4 cents at $25.09, or 0.14% lower. Details on first-day inflows into the fund will not be available until later on Friday.
LIQUIDITY CONCERNS
Moody's Ratings expects regulators to approve similar private credit ETFs but has concerns about aspects of the new fund, said Neal Epstein, the agency's vice president of private credit. "Private credit is inherently illiquid."
In the event of a selloff and a liquidity crunch, investors may want to sell their ETFs quickly, a process that requires the issuer to sell underlying securities. Apollo's liquidity commitment has an undisclosed daily limit, noted VettaFi's Chang.
"And there is no guarantee that other buyers will step in," she said.
Nate Eisenberg, product manager of private credit for Allvue, which provides a technology platform for alternative and private assets, believes those concerns are overblown.
"What was a tremendously illiquid market is now much more able to deliver liquidity to support these ETF products."
Apollo didn't immediately respond to email or phone requests for comment.
The new ETF is the first to emerge from a series of new partnerships that State Street has forged with non-traditional investment firms in the last year.