Regulator raises concerns about Apollo and State Street private credit ETF
The US Securities and Exchange Commission (SEC) has raised concerns about State Street and Apollo Global Management’s exchange-traded fund (ETF), regarding liquidity, valuations and its name.
It comes after the SPDR SSGA Apollo IG Public & Private Credit ETF officially launched yesterday, trading under the ticker PRIV.
The regulator has written a letter asking the firms for more information, which was published in an SEC filing.
One area of concern related to liquidity.
A previous SEC filing had indicated that private credit will generally make up between 10 per cent and 35 per cent of the fund’s portfolio.
This is above the mandatory 15 per cent limit for illiquid investments, but Apollo has agreed to purchase back private credit assets at State Street’s request which was thought to have circumvented the regulatory limit.
Read more: Private credit ETFs pose “structural risks”
However, in the letter, the SEC said it has concerns regarding the fund’s liquidity risk management.
“We acknowledge that the liquidity of any fund portfolio position will depend on future circumstances,” it said. “We do not believe, however, that it would be sufficient…to rely solely on bids from Apollo under the agreement to find an AOS investment not to be illiquid.”
The regulator also questioned whether the fund will be able to redeem securities on demand from shareholders, approximating their proportionate share of the fund’s net asset value, and that fair value could be determined for the fund’s assets on a daily basis.
Additionally, the SEC said it was concerned that the use of Apollo in the fund’s name is misleading and asked the firms to “revise the fund’s name to reflect the limited nature of Apollo’s relationship with the fund.”
It noted that Apollo does not have a contractual obligation to make available any investment for the fund to buy, that the fund could sell investments to other counterparties and that Apollo is not a sponsor, distributor, promoter, or investment adviser to the fund.
Private credit ETFs are a growing trend, as fund managers look to widen access to the asset class to retail investors by providing a liquid wrapper around illiquid investments.
Read more: BondBloxx launches private credit ETF
Moody’s Ratings analyst and VP of private credit Neal Epstein heralded the approval of Apollo and State Street’s ETF but warned of potential risks regarding the contractual agreement between the two firms.
“The approval of Apollo and State Street’s private credit ETF opens a slice of a market largely accessed by institutional investors to retail investors, a credit positive development for both of these companies and the broader market,” he said. “We anticipate additional offerings of this type.
“Although private credit will generally range between 10-35 per cent of PRIV’s portfolio it does pose risks. While ETFs trade like public stocks, private credit is inherently illiquid and often encompasses non-investment grade forms of debt. Apollo’s contractual agreement to provide executable bids on all investments it originates that PRIV will hold, a key feature of the ETF’s liquidity management, particularly raises potential risks arising from reliance on Apollo’s ability to purchase securities from PRIV, and the reliance on Apollo’s market making to set the pricing of these trades.”
