New ETF PRIV Bridges Private And Public Credit, Draws Investor Interest And SEC Concerns

The financial world is abuzz with the launch of a groundbreaking ETF, the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV), which aims to bridge the gap between private and public credit markets. This actively managed fund, a collaboration between State Street Global Advisors (SSGA) and Apollo Global Management, has garnered significant investor interest while also attracting scrutiny from the U.S. Securities and Exchange Commission (SEC).

PRIV seeks to maximize risk-adjusted returns and current income by investing primarily in investment-grade debt securities, including a combination of public and private credit instruments. The fund's unique structure allows it to allocate at least 80% of its net assets to investment-grade debt, while also incorporating a crucial private equity element. This exposure to private credit is facilitated through Apollo's expertise, giving investors a unique way to tap into this market segment.

The fund's debut comes as investor appetite for private credit surges, with PRIV seeing solid first-day interest, attracting net inflows of $1.2 million. However, the SEC has raised concerns regarding the ETF's liquidity, naming conventions, and valuation compliance. A letter sent by the SEC flagged issues with the fund's transparency and questioned why certain details in a key agreement between State Street and Apollo were heavily redacted. State Street has acknowledged the SEC's concerns and expressed plans to respond accordingly, while Apollo maintains confidence in its strategy of bridging private and public markets.

To meet SEC guidelines, the fund will cap illiquid investments at 15%, though its private credit exposure is expected to range from 10% to 35%. This filing has been controversial, with early concerns centering around the pricing State Street receives for private credit instruments if Apollo is the only firm providing liquidity. However, State Street can source from other firms if it can get better prices. Another issue is the limited redemption flexibility, as Apollo's obligation to repurchase loans is subject to contractual levels designed to cover the estimated seven-day stress redemption rate. It's not clear what happens after that, and it's uncertain if market makers would accept private credit instruments for redemption.

In conclusion, the launch of PRIV marks a significant development in the convergence of private credit and public markets. While the fund has drawn investor interest, it also faces regulatory scrutiny from the SEC regarding its liquidity, naming conventions, and valuation compliance. As PRIV works to address these concerns and meet SEC guidelines, investors will be closely monitoring the fund's performance and accessibility. The unique structure of PRIV offers investors the potential for higher returns and diversification benefits, but it also comes with increased illiquidity risk and potential volatility. The active management strategy employed by PRIV's portfolio managers aims to mitigate these risks and enhance risk-adjusted returns.