MW State Street's private debt ETF launched with big buzz. What does it hold?

By Christine Idzelis

The SPDR SSGA Apollo IG Public & Private Credit ETF has begun trading without much private credit in its portfolio, according to CFRA Research analysis

A recently launched exchange-traded fund actively managed by State Street Global Advisors has been drawing attention for bringing private credit to the masses in a way ETFs had not yet done.

So how much private credit does the SPDR SSGA Apollo IG Public & Private Credit ETF PRIV hold?

"Not much" to start, said Aniket Ullal, head of ETF research and analytics at CFRA Research, in a phone interview. Based on his analysis, the new fund had around 5% exposure to private credit on March 3, he said, noting that could change as the fund is actively managed.

Ullal also said it was not clear to him which of its holdings might have been provided by Apollo Global Management $(APO)$, the alternative asset manager appearing in the name of the new ETF as it made its market debut last week. In announcing the launch, State Street said on Feb. 27 that the fund may invest in private credit sourced by Apollo.

But it appears the ETF's name will be revised at the request of the Securities and Exchange Commission to reflect the "limited nature" of the new fund's relationship with Apollo, according to a regulatory filing.

The SEC raised concern that using Apollo in the ETF's name may be "misleading" partly because "Apollo does not have a contractual obligation to identify and make available (or offer) any investment for the Fund to buy," according to the filing. The filing, which shows communication between State Street's attorneys and the SEC, also indicates that the ETF may sell investments sourced by Apollo to other buyers.

The SPDR SSGA Apollo IG Public & Private Credit ETF is "groundbreaking" in that it may give ordinary investors access to "private credit to the deepest level we've seen yet in the realm of ETFs," said Kirsten Chang, a senior industry analyst at VettaFi, in a phone interview.

According to Ullal's analysis of the new ETF laid out in a CFRA note Thursday, the fund's 5% private-credit exposure as of March 3 included securitized debt and a bond issued by a business development company, or BDC, "rather than individual private corporate debt."

He highlighted the breakdown of the ETF's portfolio as of March 3 in the chart below.

Public corporate debt, Treasurys and "agency pass-throughs" - or mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac - accounted for 76% of the ETF's exposure, according to Ullal. "About 42% of PRIV's exposure is in public corporate debt, with 19% in securitized agency mortgages and 15% in Treasurys or cash instruments," he wrote.

Asset managers have been looking to "crack the code" on packaging private-market assets in an ETF - with the complication being they are more "illiquid," Chang said, or not easily traded like stocks and bonds traditionally found in investors' portfolios.

A risk for investors in an ETF with a significant portion of assets that are difficult to sell is that it may face a "liquidity crunch," she said, adding that "due diligence" is important when considering investing in complex private-credit strategies.

'Significant industry attention'

The SPDR SSGA Apollo IG Public & Private Credit ETF has "received significant industry attention because it proposes to hold between 10% and 35% (and potentially even more) of its portfolio in private credit instruments," Ullal wrote in the CFRA note. "This would exceed the 15% limit on illiquid securities as stipulated by Rule 22e-4 of the Investment Company Act of 1940."

The ETF's private-credit assets will be primarily, but not solely, sourced by Apollo, he said.

"The fund received launch approval from the U.S. Securities and Exchange Commission $(SEC.UK)$ despite Rule 22e-4 because it entered into an agreement where Apollo 'has contractually agreed to provide intraday, firm, executable bids' on private credit investments that it has sourced,'" wrote Ullal. "Therefore, in theory, investors would expect PRIV to have meaningful exposure to private credit," he said, referring to the ETF's ticker.

The ETF caps investments deemed illiquid at 15% per the SEC's requirement, according to Chang, who said its private-credit exposure may encompass "more tradable private assets."

The Feb. 26 prospectus for SPDR SSGA Apollo IG Public & Private Credit ETF indicates that the wide range of private-credit assets in which the fund may invest may include areas such as "nonbank lending" and private offerings. The private-credit assets it may hold could include asset-backed and corporate finance investments sourced by Apollo, according to the prospectus shows.

Private credit has rapidly increased globally in recent years to $1.6 trillion in assets under management at the end of 2024, according to a report last month from Fitch Ratings, citing Preqin data. "Direct lending accounts for the majority of private credit," Fitch said, noting that BDCs, which invest in debt of private companies, are "a meaningful part of direct lending."

The broad universe of private credit includes riskier loans that asset managers provide directly to midsized companies, with such nonbank lending expanding as it attracted institutional investors seeking extra yield in private markets, according to Chang. Many of those direct loans may not be rated and they could be used to finance private-equity-backed deals, she said.

State Street said in its announcement on the launch of SPDR SSGA Apollo IG Public & Private Credit ETF that the fund will invest primarily in investment-grade debt securities, "including a combination of public and private credit such as asset-based finance and corporate lending."

Based on the ETF's holdings on March 3, Ullal said "it's actually right now a fairly liquid portfolio."

A spokesman for State Street didn't immediately provide comment on the SPDR SSGA Apollo IG Public & Private Credit ETF's exposure to private credit. A spokesman for Apollo declined to comment, pointing to public documents on the firm's agreement with State Street on the ETF.

"The agreement requires Apollo to publish three executable quotation sheets per day to buy securities held in PRIV that were sourced from Apollo," said Ullal. "These quotes must be no worse than those offered to 'similarly situated clients,'" he said, reflecting language seen in a recent document on the agreement that was filed with the SEC.

"Apollo will accept orders up to a daily limit, i.e. 25% of the funds' holdings in an Apollo-sourced investment," Ullal wrote.

"Going forward, it seems likely that this actively managed ETF will start to take on more private credit that is sourced from Apollo," he said in the note. "This will be important for investors to monitor since a future tilt in the portfolio to more private debt will change the credit quality and liquidity profile of the ETF over time."

-Christine Idzelis

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March 06, 2025 17:21 ET (22:21 GMT)

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