The SEC’s decision to publicly voice concerns about State Street Global Advisors’ and Apollo’s private credit exchange-traded fund after it approved the new product has led sources to both question the regulator’s motives and ask what the wider consequences may be.
The SEC questioned the fund’s liquidity management, valuation practices, and the use of Apollo’s brand in its name, SPDR SSGA Apollo IG Public & Private Credit ETF.
As a result, on Wednesday Apollo published more detailed terms on the liquidity agreement for the fund, $PRIV. The document spells out that Apollo's daily purchase commitment for any investments it sources for the ETF is capped at 25 percent of the net asset value at the end of the prior day. There’s also an additional rolling cap of 50 percent of the previous five days trading. Apollo will also provide three executable bids daily for each investment it sources.
Even though the two firms could potentially make more changes to reflect a February 27 letter, releasing the additional details should allay some fears about the liquidity profile. A potential removal of the Apollo brand from the name to avoid confusion cited by the SEC may also be in the cards (Bloomberg reported that the Apollo name would be dropped from the fund, although that has yet to be reflected online or confirmed.)
Sources say that the ETF remains in good shape despite the questions and further adjustments that may be needed further down the line. The fund, designed to offer the asset class to retail investors by unlocking the de facto liquidity barriers of private markets, has had some success in the days since its launch, bringing in $55.15 million as of March 5.
Dafina Dunmore, senior director in the North American Non-Bank Financial Institutions group at Fitch Ratings, said that the timing of the questions is particularly interesting.
“The fund got approved to trade, and then the SEC came out after the approval and raised red flags around the structure. We would have expected that to all happen during the regulatory approval process,” she said, adding that the risks raised are valid regardless. “To the extent that these things will be addressed, we'll be interested to hear the response, or see if there is some restructuring of the vehicle. But it got approved, so that's the first thing.”
It is unclear why the fund was approved before these concerns had been voiced or changes had been made, but the lack of leadership at the SEC could be partially responsible. The launch of a new kind of product like this requires transparency and clarity, with first movers often providing a proof of concept to be built upon.
The fund is indicative of a much wider trend of offering similar hybrid public-private market funds to allow retail and unaccredited investors access to a growing part of the market. And the SEC’s approval is further evidence that the commission is willing to act, despite the new administration’s broad focus on deregulation and a lack of permanent leadership at the agency. BondBloxx and Targus launched private credit ETFs late last year, blowing the market wide open.
Among the SEC’s concerns is the accuracy of the mix of public and private investments that is detailed in the fund’s prospectus. The prospectus states that private credit will comprise between 10 and 35 percent of net assets and also says that there is a 15 percent cap on illiquid investments. Both, of course, can't be true. The SEC also noted that Apollo was under no contractual obligation to make investments for the fund, nor was it the sponsor, distributor, investment adviser to the fund, all of which implies that including Apollo in the fund’s name was “misleading. (One industry expert said the clarifications should have been made before the approval was granted and may reflect turnover at the SEC and a lack of leadership.)
Dunmore said the commission's questions would not impact the rating agency’s overall view on Apollo and would not lead to any change in credit rating.
“This won’t have much reputational risk but as a manager you want to come out with a new fund and for there to be a lot of excitement around it, not to have the SEC asking questions first thing out of the gates,” she said. “From a brand perspective it's certainly not what they want, but we don't think it's going to be a huge impact.”
Dunmore expects the managers to adequately tweak the product and prospectus to address the “red flags” that the commission has raised.
She also added the questions are unlikely to deter copycat funds from launching in the future or slow down the development of private market products that are attractive to retail investors because “the addressable market is too big.”
Danielle Johnson, global head of the institutional client group at HSBC, said that Apollo, which has a history of being the first to act in a new market, and in this case, recognized that a private credit ETF could be an innovative way to marry investments with a long duration with more near-term liquidity options.
Johnson argues that people can't always easily sell public investments, especially in a stressed situation. “The implication of this convergence of public and private equity is that right now people think that public securities, stocks, and bonds are super liquid and safe. But the point that Apollo is trying to make is they're really not any better or safer in reality," she said, adding that private assets shouldn't have a higher risk premium just because of a lack of liquidity. In fact, public and private investments may reach parity over the next five years.
