Stay Curious, Produce Success
By Dave Hoffman, Editor
The Wall Street Journal recently reported on larger investment banks’ efforts to launch ETFs and other retail products that will expand the ability of the average investor to access private credit. Private credit allows corporations and consumers to secure loans from non-banking institutions, and allows investors to achieve fixed income at a higher interest rate. While institutions and larger RIAs have been eagerly investing directly in private credit funds, the ETFs would make the $1.7 trillion market available to anyone with a trading account.
While not commenting on any sprcific sponsor’s filings, Brett Sheely, Head of ETF Specialists at AllianceBernstein thinks providers may face challenges surrounding around liquidity, including regulatory requirements, and the ability of market makers to price the instruments.
“While there are measures you can take to enhance the short-term liquidity needs of a portfolio to facilitate the ETF structure, in some cases those solves might be dilutive to the strategy,” Sheely said. “For example, if you need private credit in your portfolio, you might not be as interested in something that might look and feel much more like the risk & return stream of a high yield portfolio by the time you adjust for the liquidity needs of the vehicle.”
Michael Crook, Chief Investment Officer of Mill Creek Capital Advisors sees private credit ETFs as potentially providing the benefit of price discovery for the underlying positions in times of market stress, but also thinks that the democratization of alternative investments should only go so far.
“Private credit ETFs attempt to solve the liquidity mismatch by combining private credit with liquid credit, but blending the two isn’t a panacea,” said Crook. “If it becomes clear that the private credit investments in the ETF are mismarked, we could see a run for the exits without any mechanism to stem the tide.”
With alternatives such as interval funds available to investors looking for comparable exposure, private credit ETFs may call for closer examination.
“The ETF industry has been very creative in its ability to continue to expand the borders around what is possible in the ETF structure, so this space bears watching,” said Sheely. “Even if the returns aren’t as pure as a direct private credit exposure, the daily liquidity benefit might be appealing as a portion of an investors overall alternatives allocation.
