Apollo and State Street join forces for a public-private credit fund

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Apollo Global Management and State Street are joining forces to launch an exchange-traded fund that invests in both public and private debt, in the latest effort by the investment giants to sell alternative assets to retail investors to fuel their next stage of growth.

SSGA, the $4.37 billion asset management arm of the custodial bank, filed plans to list the ETF with the U.S. Securities and Exchange Commission on Tuesday. The product will hold mostly investment-grade debt, including private credit that was originated by Apollo.

The new fund comes as both traditional asset managers and large private equity and credit houses step up their efforts to sell products to retail investors that pool unlisted private credit and other alternative assets into funds that offer some regular liquidity.

KKR and Capital Group announced a similar public-private debt partnership in May, and Blackstone has had enormous success with semi-liquid credit and real estate funds aimed at the very wealthy.

The private equity giants are looking for new clients in addition to their traditional base of sovereign wealth funds, pensions and endowments. Traditional asset managers, meanwhile, want to offer a wider range of products to retain clients and increase fees.

Retail investors are expected to become a much larger buyer of alternative investments such as private credit. Cerulli Associates, a consulting company, estimated that financial advisers will increase their investments in alternative investments, such as private credit, from $1.4 billion to $2.5 billion by the end of 2025.

“Private assets are one of the fastest growing sectors in the financial industry. . . This relationship combines the strengths of two market leaders to allow even more investors to participate,” said Ron O’Hanley, chief executive of State Street, which pioneered ETFs with an S&P 500 fund in the 1990s.

The new fund – SPDR SSGA Apollo IG Public & Private Credit ETF – will trade daily like public securities and will allocate at least 80% of its portfolio to investment grade debt, the filing said. This will be made up of both publicly traded debt and credit that Apollo sources itself. The fund can invest up to 20% in junk debt.

The New York-based investment group is moving toward a goal of raising $150 billion a year in debt, bonds and loans that it uses to feed both its own and rival insurers. The offerings, in some cases backed by consumer, property or equipment loans, offer higher yields than traditional exchange-traded bonds.

The move to put private assets, which don’t trade regularly and are harder to value than bonds or loans that change hands frequently, into funds with daily liquidity has generally not been tested by a market downturn.

Apollo agreed to quote and provide what it characterized as “firm offers” for all the debt it generated for the fund. However, the filing warns investors that if Apollo cannot meet this contractual obligation, some assets “may become illiquid.”

Marc Rowan, chief executive of Apollo, told investors in August that: “There is no real liquidity in the public fixed income markets. So the liquidity trade-off is not that huge.”

State Street is the third-largest issuer of U.S. ETFs, including the world’s largest gold ETF, but has lost market share in recent years as investors pour record amounts into actively managed ETFs. Earlier this year, the company added Anna Paglia as chief business officer, putting the Invesco veteran in charge of long-term growth for SSGA’s global ETF franchise.