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Apollo Global Management and State Street are combining forces to launch an exchange traded fund that invests in both public and private credit, in the latest effort by giant investment firms to sell alternative assets to retail investors to fuel their next leg of growth.
SSGA, the custody bank’s $4.37tn asset management arm, filed plans to list the ETF with the US Securities and Exchange Commission on Tuesday. The product will hold mostly investment grade debt, including private credit that has been originated by Apollo.
The new fund comes as both traditional asset managers and big private equity and credit houses boost their efforts to sell retail investors products that bundle unlisted private credit and other alternative assets into funds that provide some regular liquidity.
KKR and Capital Group announced a similar public-private debt partnership in May, and Blackstone has had enormous success with semi-liquid credit and real estate funds aimed at very wealthy individuals.
The private investment giants are looking for new customers on top of their traditional investor base of sovereign wealth funds, pensions and endowments. Traditional asset managers, meanwhile, want to offer a wider range of products, in order to hang on to their clients and boost fees.
Retail investors are expected to become a much larger buyer of alternative investments, such as private credit. Cerulli Associates, a consultancy, has estimated that financial advisers will boost their holdings of alternative investments such as private credit from $1.4tn to $2.5tn by the end of 2025.
“Private assets are one of the fastest growing sectors of the financial industry . . . This relationship combines the strengths of two market leaders to allow even more investors to participate,” said Ron O’Hanley, chief executive of State Street, which pioneered the ETF with an S&P 500 fund in the 1990s.
The new fund — the SPDR SSGA Apollo IG Public & Private Credit ETF — will trade daily like public securities, and allocate at least 80 per cent of its portfolio to investment grade debt, the filing showed. That will be made up of both publicly traded debt, as well as credit that Apollo is sourcing on its own. The fund can invest up to 20 per cent in junk debt.
The New York-based investment group is driving towards a target of originating $150bn of debt a year, bonds and loans that it uses to feed both its own and rival insurers. The deals, in some cases backed by consumer, property or equipment loans, offer higher yields than traditional publicly traded investment-grade bonds.
The move to put private assets, which do not trade regularly and are harder to value than bonds or loans that change hands frequently, into funds with daily liquidity has not broadly been tested through a market downturn.
Apollo has agreed to quote and provide what it characterised as “firm bids” on all of the debt that it has originated for the fund. The filing nonetheless warns investors that if Apollo cannot meet that contractual obligation, some assets “may become illiquid”.
Marc Rowan, Apollo’s chief executive, told investors in August that: “There is no real liquidity in public fixed income markets. So, the trade-off of liquidity is not that immense.”
State Street is the third-largest US issuer of ETFs, including the world’s largest gold ETF, but it’s been losing market share in recent years as investors pour record sums into actively managed ETFs. The company earlier this year added Anna Paglia as chief business officer, putting the Invesco veteran in charge of long-term growth for SSGA’s global ETF franchise.