Private Credit ETFs Launched, But Were They Ready?

A Quick Recap: The Liquidity Mismatch Problem

When the private credit ETF structure was first introduced, the primary question was whether the ETF wrapper could effectively handle the illiquid nature of private credit assets.

Unlike traditional bonds, private credit investments lack a centralized exchange, making real-time pricing and liquidity provision difficult. The key concerns raised in my original article were:

• Liquidity Shortfalls: Can Apollo, as the designated liquidity provider, meet redemption demands in a market downturn without triggering distressed sales?
• NAV Accuracy: With limited price transparency, how reliable are the valuations provided by Apollo?
• Systemic Risk: If Apollo faces financial stress, what safety nets exist to ensure the ETF does not suffer from liquidity shocks?

Now, just weeks after launch, these issues have come under intense regulatory scrutiny.

SEC Raises Immediate Concerns: A Reactionary Approach?

The SEC’s unusual move to issue a warning immediately after the ETF’s launch signals deep-rooted concerns about the structure of private credit ETFs. The commission specifically highlighted:

• The potential for investor confusion given Apollo’s name in the fund title (prompting a quick rebranding to SPDR SSGA IG Public & Private Credit ETF).
• The ETF’s ability to manage liquidity under stressed market conditions.
• The challenges of valuing illiquid private credit assets in real-time.

This raises an important question: why were these concerns not fully addressed before the SEC approved the ETF’s registration? If the liquidity risks were so apparent, should the SEC have taken a firmer stance prior to launch rather than reacting after the fact?

A Patchwork Solution: A Name Change, But No Structural Fixes

In response to the SEC’s concerns, State Street and Apollo promptly removed "Apollo" from the ETF’s name. While this may mitigate potential branding confusion, it does nothing to resolve the structural risks of liquidity shortfalls and valuation opacity. Investors are still left questioning:

• How much liquidity can realistically be provided in a crisis scenario?
• Will fair value pricing adequately reflect private credit risk in volatile markets?
• Is investor protection sufficient if Apollo, as the primary liquidity provider, faces capital constraints?

With any new rollout, there may be issues arising from a new structure that disrupt the custodian or issuer’s systems, leading to valuation or operational inconsistencies. However, one would hope that a product with this level of scrutiny and regulatory attention would have had many of these concerns ironed out before launch.

New Findings: Unstable Valuations and Pricing Gaps

Recent analysis by Conor MacWilliams, Owner of Outer Beach Consultants, has shed further light on valuation inconsistencies and potential pricing concerns within PRIV. MacWilliams regularly covers ETF developments and market structure insights on his Substack, which you can find here: https://outerbeachconor.substack.com/p/priv-and-priv-accessories-march-10th

 His latest findings suggest that:

• Some holdings had incorrect market values reported, requiring manual adjustments.
• SSGA has yet to respond to inquiries regarding these valuation inconsistencies, leaving transparency concerns unaddressed.
• Certain private assets have not had their marks updated, raising questions about the accuracy of the ETF’s NAV calculation.
• Some assets appear to be marked based on correlated market movements rather than actual trades, a practice that could cause mispricing during periods of market stress.

One particularly interesting holding, AP GRANGE Holdings, is a private financing deal between Apollo and Intel for a 49% stake in Fab 34 in Ireland.

While this structure allows Intel to raise capital without issuing traditional bonds, it also introduces new layers of financial complexity that investors may not fully understand.

Why Were These Issues Not Addressed Pre-Launch?

The launch and immediate SEC scrutiny of PRIV raises broader concerns about the ETF regulatory process.

If these risks were foreseeable, why weren’t they proactively mitigated before approval? Did the urgency to bring private credit ETFs to market overshadow the need for structural safeguards? More importantly, how will future private credit ETFs address these gaps?

This situation serves as a crucial test case for the viability of private credit ETFs. The SEC’s late-stage intervention, coupled with minimal post-launch adjustments, underscores the need for greater transparency, independent valuation mechanisms, and clear redemption policies before the next wave of these products hits the market.

Final Thoughts: A Watershed Moment for Private Credit ETFs

Private credit ETFs hold immense potential, but their long-term success depends on how well they navigate liquidity risks and regulatory scrutiny. The SEC’s intervention suggests that current models may still be insufficient to handle periods of market stress.

If investors are to fully trust this new product category, ETF issuers must proactively address these concerns—not after launch, but before these products reach the market.

The real question remains: will the industry adapt and refine these structures, or will regulatory pressure force a fundamental rethink of private credit ETFs before they gain mainstream adoption?

About the Author

Nicholas Phillips | President of ETF Capital Markets Advisors LLC
With over 25 years of experience in ETF market making and capital markets, Nicholas Phillips is recognized as a subject matter expert in the ETF industry. He started his career spending the first ten years as a lead market maker for SIG and Goldman Sachs.

At the helm of MCAP LLC's ETF Desk, Nicholas built and scaled the division, enhancing its operations through innovative pricing and risk models, and robust relationships with market makers and issuers. His tenure at Van Eck Associates as Director of ETF Capital Markets further solidified his expertise, managing critical facets of operations and deepening connections within the trading community.

Beyond market making, Nicholas is an avid content creator, sharing insights that demystify complex market dynamics. He is keen on exploring board member roles that benefit from his extensive background and forward-thinking approach to ETF strategies. His dual US/Ireland citizenship complements his global perspective, enriching his professional endeavors in diverse markets.

Disclaimer

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.