Private credit ETFs pose “structural risks”
Private credit-focused exchange traded funds (ETFs) are starting to enter the market, enabling investors to gain access to the asset class in a more liquid wrapper.
Last month, ETF issuer BondBloxx launched the BondBloxx Private Credit CLO ETF, providing direct exposure to private credit middle market companies in the US. 80 per cent of the portfolio will be invested in private credit collateralised loan obligations.
In September, State Street and Apollo Global Management announced that they are partnering on an ETF that invests in both public and private credit, marketed to retail investors.
Anna Paglia, chief business officer at State Street Global Advisors, said at the time of the announcement that they are keen to help make private assets more accessible and liquid over time.
But analysts have warned that putting a liquid wrapper around illiquid assets can bring its own risks, especially for retail investors who may be less familiar with the asset class.
Read more: CLO ETF market grows to $19bn
“Given the market appetite for private credit and the ETF structure’s role as a vehicle for the democratisation of financial markets it is logical that we would see private credit ETFs,” said Kenneth Lamont, strategist at Morningstar.
“The ETFs just launched in the US offering direct exposure may be new, but the problems of providing exposure to illiquid assets in a liquid wrapper is an age old one. The question is, can you provide safe access to an illiquid assets class without eroding the very benefits that made that asset class attractive in the first place?
“Proving intra-day liquidity to infrequently priced illiquid assets, inevitably means investors in the ETF become exposed to some additional structural risks. In the case of the proposed SPDR SSGA Apollo IG Public and Private Credit ETF in the US, as liquidity provider, the Apollo role is crucial to the functioning of the product. The allure of higher yields may be attractive to retail investors, but they should remain sceptical, as the costs – in terms of higher management fees and additional structural risks – may well outweigh any additional return potential.”
