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Investment firms want to offer private-credit ETFs to ordinary investors, the WSJ reported.
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It would give retail investors access to a $1.7 trillion market.
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It could be tricky, as private credit tends to be illiquid while ETF investors need high liquidity.
A booming corner of the financial markets that has only been available to institutions might soon be open to everyday investors.
According to The Wall Street Journal, some of the biggest private equity and investment management giants want to offer retail investors access to exchange-traded funds backed by private credit. The term broadly refers to loans made to companies and consumers by nonbank lenders.
Historically, fund managers have sold “alternative assets” like private debt to institutional investors at a high cost, generating returns of around 10% in recent years — more than they would have seen from investing in the stock or bond markets.
Now, as those institutions slow allocations to private credit, the biggest players in the space want to target a new class of investors.
According to the Journal, firms like State Street, Apollo Global Management, and BlackRock are working to roll out private credit ETFs to regular investors.
The challenge, though, is building a highly liquid ETF out of illiquid private loans. That hurdle is also what will likely draw the eye of regulators as they ensure the ETFs are appropriate for retail investors.
But if these ETFs get approved, they will enable regular investors to tap into a booming market, one that BlackRock expects will more than double to $3.5 trillion by 2028.
The race to launch private credit ETFs has heated up in recent months.
In May, Capital Group and KKR teamed up to start offering funds investing in both public and private assets—including in private credit—starting next year.
Last month, State Street proposed a private debt ETF to the Securities and Exchange Commission. The ETF would blend public debt with private debt on mortgage, corporate, and consumer loans purchased from Apollo Global Management.
Anna Paglia, State Street’s chief business officer, said in a statement the ETF would “democratize access to private asset exposures,” and make them “more accessible to a wider swathe of investors.”
“It is our goal to bring these investments to scale and help facilitate the process of making private assets more accessible and liquid over time. We see this as only the beginning of a new wave of innovation as public and private markets increasingly converge,” Paglia said.
Alternative assets make up a small share—less than 3%—of individual investors’ global investments, KKR’s head of Global Client Solutions Eric Mogelof, told the Wall Street Journal.
But he says there is huge potential for that share to grow by over three times. “We anticipate these allocations to rise to 10% or greater in the future,” he told the Journal.
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