The U.S. Securities and Exchange Commission expressed concerns over a much-anticipated private credit exchange-traded fund from Wall Street giants State Street Corp. and Apollo Global Management Inc., asking the firms for more information in a letter dated Feb. 27.
The regulator’s worries center on the fund’s liquidity, its name and its ability to comply with valuation rules, according to the letter. It also noted that the fund continued to respond to staff questions by email even when instructed not to, and questioned why a filed copy of a key agreement between the firms was redacted to the extent that it was.
The letter came after the ETF officially launched on Feb. 27, debuting on the New York Stock Exchange under the ticker “PRIV.” It’s a swift response to an ETF that brings together the very private world of direct lending and a more democratic market for trading.
Apollo’s Chief Executive Officer Marc Rowan in particular has been predicting the convergence of private and public markets, noting that there will come a time when people will question the difference between the two. Representatives for Apollo and State Street declined to comment.
Brent Fields, the associate director of the SEC’s division of investment management, said in the filing that the SEC has “concerns regarding the Fund’s liquidity risk management program.”
The ETF will cap investments deemed illiquid at 15% to conform with SEC requirements, but its private credit exposure is generally expected to comprise 10% to 35% of the portfolio, a separate filing shows.
Private credit has historically been illiquid and difficult to trade. Those traits, however, have helped boost its appeal, offering investors a place to ride out volatility in public markets and potentially giving struggling companies a little breathing room to improve their performance, away from prying eyes.
It’s precisely these qualities that complicate the issue of valuing private credit. Meanwhile, ETF assets need to be valued often and swiftly.
Direct lenders aren’t the only ones trying to expand private markets into the mainstream world of ETFs. Apollo’s filing for the exchange traded fund last year prompted some ETF providers to mimic private equity exposure, although not by direct PE investments.
In filings, the ETF said that Apollo signed an agreement with the fund to provide firm bids on deals it’s sourced on a daily basis and at certain intervals, in an effort to show liquidity. But that is drawing concerns from the SEC, which said that it wouldn’t be enough to “rely solely on bids from Apollo” to ensure liquidity.
The SEC also expressed concern about the fund’s name, SPDR SSGA Apollo IG Public & Private Credit ETF. As Apollo does not have an obligation to sell any debt to the fund and it’s not an adviser or sponsor to it, it’s “misleading” to have the ETF named after the credit giant, the regulator said.
The commission also highlighted the ETF’s ability to redeem its securities on demand from shareholders at a price approximating their proportionate share of the fund’s net asset value at the time of redemption.
The ETF may also “achieve exposure” to private credit instruments by investing in interval funds or business development companies, which focus on providing direct loans, though these will be limited to 15% of its net assets, a fund filing shows.
There is some precedent for the Wall Street watchdog to allow the listing of funds it has doubts about. Back in 2021, two ETFs offering leveraged strategies tied to the Cboe Volatility Index, or VIX, began trading even as then SEC Chair Gary Gensler announced the regulator was studying the risks of such complex products. Though they “can be consistent with the Exchange Act, that doesn’t mean the products are right for every investor,” he wrote at the time.
In 2022, it was a similar story for the launch of the first single-stock ETFs in the US. As they began trading, SEC Commissioner Caroline Crenshaw cautioned investment advisers about the products, and called for the SEC to adopt new rules that would specifically address the potential risks they raised.
