Private Credit ETFs: A New Frontier, But Is Liquidity a Concern?

The Liquidity Mismatch: A Fragile Balance

The core issue with private credit ETFs is the fundamental mismatch between daily liquidity and illiquid holdings. In a normal market, the ETF may function as designed, balancing public and private credit within a reasonable range. But in a stressed environment, redemptions could rapidly deplete the fund’s liquid assets, forcing the ETF to either:

1. Sell illiquid private credit holdings at distressed prices, impacting NAV and fund performance.
2. Use credit lines or bridge financing to meet redemptions, adding counterparty risk.
3. Restrict or delay redemptions, which could shatter investor confidence and widen trading spreads.

A worst-case scenario would be a liquidity spiral, where outflows lead to a rising concentration of illiquid private credit within the ETF—further reducing liquidity and increasing the risk of NAV dislocations.

Valuation Challenges & Fair Value Pricing

One of the most overlooked risks in private credit ETFs is NAV accuracy. Private credit securities do not trade daily, making valuation inherently complex. While Apollo provides price bids for the assets, the challenge is ensuring that these valuations accurately reflect market reality, especially in times of stress.

To mitigate this, private credit ETFs must:

• Utilize multiple independent third-party valuation sources to prevent conflicts of interest.
• Strengthen fair-value pricing models to adjust NAV during volatile periods.
• Ensure that APs and market makers have confidence in pricing, so they are willing to facilitate efficient ETF trading.

If valuation lags reality, investors could either overpay or under receive on redemptions, leading to potential mispricing’s and liquidity gaps in the secondary market.

Systemic Risk: What If Apollo Faces Trouble?

Another looming question is: What happens if Apollo itself faces financial distress?

While Apollo has committed to providing bids for private credit assets, its ability to do so depends on its own financial health. In a severe market downturn, if Apollo’s liquidity deteriorates or dries up, the ETF could be left without a reliable buyer of last resort.

This scenario introduces a new type of systemic risk for ETFs, where an issuer’s financial condition could directly impact ETF liquidity. Investors need greater transparency into Apollo’s liquidity commitments, including:

• Clearer daily liquidity limits and whether Apollo has the ability to scale its commitments.
• Alternative sources of liquidity, ensuring the ETF is not entirely dependent on Apollo’s willingness or ability to transact.
• Regulatory oversight and stress testing to assess how well these structures hold up under pressure.

Final Thoughts: Can Private Credit ETFs Handle Market Stress?

Private credit ETFs are an exciting development, but their success hinges on how well they can manage liquidity during turbulent periods. The industry must ensure that proper guardrails—fair value pricing, independent valuations, and diversified liquidity providers—are in place before widespread adoption occurs.

If structured correctly, private credit ETFs could offer investors new opportunities to access a historically hard-to-reach asset class. But without careful liquidity management and transparency, they risk becoming a dangerous liquidity trap—one that could leave investors stuck holding the least liquid portions of the fund when they need to exit most.

The real test will come when market volatility strikes. Will these ETFs function smoothly, or will they reveal structural weaknesses that force regulators to rethink their approval?

For now, private credit ETFs represent both an innovation and an experiment—one that investors must approach with caution.

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 this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.