Trending
To the surprise of many clients and investors, private credit isn’t a young asset class. In varying forms, it’s been around since the 19th century, but because it features the word “private,” it’s recently generated interest among a broader swath of market participants.
Private credit is considered an alternative investment. Combine that with its elite country club aura and it wouldn’t be surprising advisors have fielded more inquiries about private credit. Until recently, the problem was access. As in private credit was long the territory of institutional and ultra-high-net-worth investors, making it something of a “rich get richer” proposition.
Leave it to the exchange traded funds industry to provide private credit with needed democratization, the latest iteration of which is the SPDR SSGA IG Public & Private Credit ETF (PRIV). The actively managed PRIV debuted in February and is unique among ETFs addressing private credit owing to the issuers relationship with Apollo Global Management.
In plain English, the Securities and Exchange Commission (SEC) has a 15% limit on the amount of assets deemed illiquid a fund can hold, but because Apollo is pledging to buy such assets, PRIV earns a workaround where its percentage of illiquid assets can be as high as 35%. It remains to be seen if PRIV solves the liquidity issue that often surrounds private credit, but at the very least, the new ETF will employ a novel approach.
Private Credit Points of Interest
Due to it being private and the aforementioned potential for illiquidity issues, private credit can be assumed to be a smaller corner of the credit market. However, that’s far from accurate. As State Street Global Advisors (SSGA) points, out the addressable market for public credit is $55 trillion, but private credit is competitive at $40 trillion.
Underscoring why pros and the wealthy have long flocked to private credit, the asset class offers diversification and yield premiums, among other benefits. As of June 9, PRIV sported a 30-day SEC yield of 4.64%, indicating it’s not overextended on that front. PRIV’s perks don’t end there.
The rookie ETF can provide exposure to “high quality income potential without sacrificing credit quality” and “exposure to unique asset-backed investments across sectors not well represented in the public market,” notes SSGA.
Regarding access, how PRIV’s relationship with Apollo is relevant because the private equity firm has a sizable credit platform that’s supported more than $220 billion in originations since last year.
(Chart Courtesy: SSGA)
PRIV’s Place in Portfolios
Broad private credit access and PRIV itself are new concepts, but that doesn’t mean they’re not relevant to advisors. Certainly not at a time when 60/40 yields are at multi-decade lows and certainly not at a time when advisors are scrambling for adequate portfolio diversification avenues.
The launch of PRIV means all investors can easily access both investment grade public and private credit securities together in an active, transparent, and tradable ETF,” adds SSGA. “When added to a traditional balanced portfolio of stocks and bonds, PRIV may offer all investors the potential for meaningful diversification beyond public markets, enhanced income generation from investment grade exposures, and improved risk-adjusted-returns.”
Bottom line: PRIV and private equity aren’t perfect, there’s a lot to like with high quality income with a diversification kicker.