ETFs Offer Gateway to Once-Inaccessible Private Markets

Lately it seems as if most roads lead to the democratization of private markets. 

Whether it’s the ongoing push by asset managers to expand reach into them, or the new regulatory muscle behind that effort (the recent executive order around private assets in 401(k)s is an example), there’s serious effort being put into broadening access to this category. 

Often associated with illiquidity, difficulty in pricing, opacity, and high costs, as well as lower correlations to other assets, and potentially higher return and income generation, private markets are a unique category. 

There’s no question that the opportunity set is both intriguing and compelling for investors. There’s also no question that alternative asset managers looking to increase their asset base benefit from tapping into new investor channels. What we know is that this category is “growing rapidly,” to quote a recent commentary from VanEck. 

“Just 10 years ago, they represented around $4 trillion in assets. Today that number has grown to about $15 trillion and industry estimates maintain that pace of growth into the next decade,” the firm said. “This expansion reflects a major shift in how investors are seeking returns, as many look beyond traditional public markets in search of better income, diversification, and long-term growth.” 

In the ETF market, accessing private markets has been an ongoing effort for a while. 

We had big headlines earlier this year when the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV ) first launched. The fund was by all measures a milestone moment for the ETF industry. 

It set out to offer direct exposure to private credit that exceeded 1940 Act rules limiting illiquid asset allocation to 15% of a portfolio. PRIV offered an allocation to private credit ranging from 10% to 35% at any time. That exposure was possible through some clever product innovation in the form of a partnership with Apollo Global Securities. 

The day-to-day execution of PRIV’s unique value proposition has been widely covered since then. Many industry participants like Outer Beach Consultants’ Conor MacWilliams have done great work exploring the challenges to democratize hard-to-access private markets through liquid wrappers like ETFs. To put it mildly, it hasn’t always been smooth. 

State Street’s Chief Business Officer Anna Paglia even said (earlier this year at Exchange), that investors need to “embrace the uncomfortable in pursuit of better results.” In other words, pursuing direct access to a new frontier such as private markets may cause a little discomfort. Most disruptive innovation usually does. 

Now, as we enjoy front-row seats to this democratization push into private markets, it’s interesting to watch the early trailblazers seeking to give the public access to the private. These ETFs — most of which provide indirect access to private markets’ return streams — stand to benefit from any broadening of investor reach, or the inclusion of private markets in retirement plans. 

VanEck has two funds in this category. Both invest in the companies involved with private equity and private credit. 

The VanEck BDC Income ETF (BIZD B-) owns publicly traded business development companies (BDCs). These investment companies lend directly to private middle market companies. 

BIZD is a play on private credit, and one where the diversified nature of the portfolio of BDCs means that investor risk exposure to sector, industry, and financing terms is broadly diversified. Today, BIZD is a $1.6 billion ETF shelling out distribution yields of about 11%. 

VanEck has also recently launched the VanEck Alternative Asset Manager ETF (GPZ ). This fund invests in publicly traded equities of private asset managers like Blackstone, KKR, and Apollo. GPZ is a path to access the growth of private markets through the growth of the alternative asset managers transacting directly in them.  

“As demand for private credit and other private market strategies grows, these companies are expanding their business models. Many are reaching beyond institutional capital and into wealth management and retirement channels, broadening their investor base and solidifying their importance in today’s investment landscape,” the firm said in a commentary. “With access to long-term capital and resilient fee structures, they are well positioned to benefit from the continued shift toward private markets.”

The Invesco Global Listed Private Equity ETF (PSP B+) is another example. The global-in-scope portfolio owns companies that are investing in, financing, or servicing privately held companies around the world, including BDCs. PSP holds around 80 names and has a distribution rate of about 7.8%. It holds more than $330 million in assets under management. 

Finally, one of the most popular approaches to accessing this space has been through ETFs centered on private credit collateralized loan obligations (CLOs). The BondBloxx Private Credit CLO ETF (PCMM ) is one of these funds, as an example. 

PCMM invests in CLOs, or pooled loans to middle-market private companies. CLOs come in tranches, which offers insight into risk exposure. PCMM is 27% allocated to AAA CLOs, and 25% to BBB. 

With compelling yields and low volatility, private credit is a diversifier to other fixed income and equities,” BondBloxx said in its midyear outlook. “It exhibits solid fundamentals and may help reduce interest rate risk, due to the floating rate nature of this asset class.” 

Product development attempting to broaden the reach into private markets, and a friendly regulatory environment supporting that push will probably translate into some disruptive and sometimes “uncomfortable” innovation in the ETF space. This will continue to be an interesting area to watch ahead.

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