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There is a new ETF in the city. SPDR SSGA Apollo IG Public & Private Credit ETF (private) will act in the NYSE on Thursday.
This fund plans to invest at least 80% of its net assets in the debt certificates of investment quality, including a combination of public credit and private credit. What is surprising is that there is an important part of private equity in the ETF -Wrapper. Because private credit is illiquid, it has been a problem to get this in an ETF -Wrapper because ETF’s liquidity needs.
They try to solve this problem by having Apollo bid credit assets and they will buy those investments back if necessary.
ETFs have had illiquid investments in the past (there are ETFs of bank loans that have illiquid investments), so this is not the first time this issue has been tackled. But Wall Street would like to offer access to private equity and credit to the masses, and ETFs are the obvious wrapper.
Normally ETFs may only have illiquid investments up to 15% of the fund, but the SEC says that private credit in this case can vary between 10% and 35%, but above or below that can be.
This application has been controversial. An early concern was that if Apollo is the only company that offers liquidity, it naturally raises questions about what kind of price street will be. However, State Street can apparently buy from other companies if it can get better prices.
Another problem: Apollo is obliged to buy back the loans, but only to a daily limit, and it is not clear what happens next. It is not clear whether the market makers would accept private credit instruments for repayment.
Bottom Line: This is a groundbreaking but very complicated ETF. It will be closely followed on liquidity.
Note: Anna Paglia, Executive Vice President, Chief Business Officer for State Street Global Advisors, will be on ETF Edge on Monday to explain how this ETF works.