Investor group warns SSGA-Apollo ETF filing ‘raises red flags’

The US Securities and Exchange Commission should reject State Street Global Advisors’ application for a private credit ETF because it poses liquidity, valuation and conflict-of-interest concerns, the Consumer Federation of America has warned.

The fund’s investment strategy “raises red flags” because it is unlikely that the fund will be able to sell certain assets within seven calendar days without significantly changing their market value, Micah Hauptman, director of investor protection at CFA, has written in a letter to the agency.

“The point of the letter is to raise concerns and to ensure that these concerns are being addressed, and if they’re not addressed, then the offering should not go forward,” he told Ignites.

Spokespeople for the SEC and SSGA declined to comment.

SSGA filed last month for an ETF that would invest at least 80 per cent of its assets in “investment-grade debt securities”, including “public credit related investments” as well as private credit investments sourced by Apollo Global Securities, a broker-dealer subsidiary of the private investment firm Apollo Global Management.

The proposed SPDR SSGA Apollo IG Public & Private Credit ETF would invest in private credit that “could be publicly traded and may be investment grade,” the application says.

The fund could also invest up to 15 per cent of its assets in private funds, closed-end funds, interval funds or business development companies to get exposure to private credit, the filing states.

An Apollo spokesperson declined to comment.

Hauptman’s letter to the SEC noted that the filing warned that “there can be no assurance that a trading market will exist at any time” or that the securities could be sold at a favourable time or price, or even at all.

A registered fund must have at least 85 per cent of its assets in securities that can be sold in current market conditions in seven calendar days without significant changes in asset value, and this filing does not reasonably meet that expectation, he wrote.

Apollo agreed to provide intraday executable firm bids on all investments held by the fund, the ETF application says.

But the existence of a private agreement between two parties “does not transform inherently illiquid assets into liquid assets”, Hauptman’s letter said. Liquidity classification is a markets-based analysis.

“There is good reason for applying a market-based analysis in this regard — if one party to the agreement is unable or unwilling to live up to their end of the bargain, the assets that were subjectively agreed to be liquid may immediately become objectively illiquid,” he wrote.

At a minimum, the fund should be required to disclose the terms of the liquidity agreement “so that investors can assess whether those terms provide confidence that Apollo will deliver on its agreement when liquidity is necessary”, Hauptman wrote.

Apollo could also potentially distort the proposed securities valuation process laid out in the application to its benefit, at the expense of the ETF investors, Hauptman wrote. The ETF should require the fund’s board or a designee to independently value holdings and mandate that Apollo repurchase securities to meet liquidity needs, “rather than at the prices Apollo is willing to pay”.

Overall, because the liquidity agreement is private, the filing doesn’t clearly state whether Apollo would be illegally exerting control or influence over the fund’s operations and could therefore be benefiting itself at the expense of the ETF’s retail shareholders, Hauptman noted.

In the ETF filing, Apollo’s repurchase obligation permits an undisclosed “daily limit”, meaning Apollo could refuse redemption requests at will, the letter noted. If Apollo refused or could not buy back the securities, which could happen during market stress, the securities could become illiquid and force a fire sale, Hauptman warned.

This could snowball, Hauptman wrote. “What had previously been considered highly liquid, ‘cash-like’ assets suddenly became illiquid, causing significant financial hardship for tens of thousands of investors,” he noted.

Apollo chief executive Marc Rowan recently said that he believed private credit was not as risky as some might have thought.

Private credit for institutional investors was headed towards developing market functions that public fixed-income markets could benefit from, such as repo borrowing, easy leverage, ratings and daily pricing, he told CNBC last month.

Soon there would be no difference in liquidity between public fixed-income securities and private credit, Rowan added, because returns would come from new loan origination.