SEC Comment Letter: SSGA Apollo Private Credit ETF Filing
Open letter to the SEC on private assets inside an ETF
My friend and hero Dave Nadig shared a letter from the Consumer Federation of America urging the SEC to disapprove a recent filing by SSGA and Apollo for a private credit ETF. This is a rare issue where Dave and I disagree. Being on the other side of an ETF issue from Dave is an uncomfortable place to be, but that’s what makes a market, as they say.
The comment letter will likely be available on the SEC’s website shortly, but I wanted to share it here as well. I feel very strongly that the lines between public and private assets will become blurred in the coming years, and I have dedicated much of my own work and Armada’s resources to solving this exact issue in ways that will become clear over the next year. Here is the rationale:
October 9, 2024
Natasha Vij Greiner
Director, Division of Investment Management
Re: SPDR SSGA Apollo IG Public & Private Credit ETF Investment Company Act of 1940 File No. 811-22542
Dear Ms. Greiner:
I appreciate the SEC’s efforts to involve the public in the regulatory process and the opportunity to submit public comments regarding industry rulemaking proposals and new fund filings.
The asset management industry is becoming increasingly top-heavy, and the largest firms often have the loudest voices in the regulatory conversation. I think it is important that firms of all sizes and on all ends of the incumbent-to-innovation spectrum participate in this process. It is in that spirit, and with the understanding that I am both a competitor to the firms who have filed for this fund, and that I am managing and building a company in its early stages and a fraction of their size that I submit this letter.
I have no economic interest in the outcome of this fund filing, and I have had no conversations with any of the parties. We have not filed a similar prospectus with the SEC, although we are developing strategies to bring private real estate onto the public markets (both through 40 Act funds, and directly), and we may file for an ETF that holds private real estate or other private assets in the future.
I am submitting this letter to express strong support for this product filing, and my hope that this fund will be approved by the commission. I would like to raise two issues for your consideration:
Price discovery of private assets
Unintended consequences of 40-Act illiquid bucket limitations
Price discovery of private assets
The US stock market is a miracle. US stock exchanges now trade more than 10 billion shares per day, and they trade with low latency and stunning connectivity. The NYSE processes over 1.5 million quotes per second at trading peaks. Three months ago, on June 28, 2024, during the Russell index reconstitution, Nasdaq executed 2,899,191,109 shares (over $95 billion) in 0.878 seconds.
The miracle is not just the volume and speed of trades. Those trades happen at the best prices anywhere on the planet, because the fundamental mechanics of the market won’t allow you to buy above the lowest offer or sell below the highest bid. It is truly a modern miracle.
Private market investors do not get to enjoy the benefits of this miracle. Private assets are often valued through opaque processes. Sourcing private market liquidity is a challenge. Investors in the private markets have no assurance that their execution prices are the best available at the moment that they trade, which public market investors enjoy.
Bringing private assets onto public markets through the ETF vehicle will lead to price discovery of those private assets where liquidity is best: the US stock exchanges.
In March, 2011, the Egyptian Exchange was closed during a period of political instability in Egypt. Despite the closure, ETFs such as the VanEck Egypt Index ETF (EGPT) continued to trade. Global price discovery moved to the US stock markets, where investors could access that investment exposure, and vote on valuation in real time with real dollars.
In June, 2015, the Athens Stock Exchange was shut down for more than a month as part of Greece's financial crisis. Despite this, the Global X MSCI Greece ETF (GREK) continued to trade on the US stock market.
In fact, ETFs tracking foreign exposure in different time zones trade every single day during US market hours, providing price discovery and liquidity for the entire global market.
Imagine if we allowed private assets to benefit from the same opportunity for price discovery and liquidity.
Unintended consequences of 40-Act illiquid bucket limitations
Investment Company Act limitations on illiquid assets ensures that the majority of holdings within 40-Act funds can be priced by investors in real time using either the last trade price or the current mid-point of the underlying securities. However, a proliferation of sophisticated real time valuation methods now allow investors to use reference prices for private assets as well.
By denying access to private assets, public market and 40-Act investors are left with inferior product structure choices in order to access this critical asset class.
Private funds are on average significantly more expensive than 40-Act funds. The leading private REIT funds charge expense ratios more than double the average ETF expense ratios - before even considering performance fees, selling commissions, lockups, and the ability to gate investors into the fund.
Even more damaging to investors is that they are investing into private funds at NAVs that are not determined by a price discovery mechanism, but by appraisals or other opaque processes. Investors, accredited or not, can’t possibly be expected to run their own valuations on a book of private assets - which is to say that they have no idea if they are paying a fair price or not.
In contrast, by allowing these assets to trade on public markets through the ETF vehicle, valuations would be determined by the point at which buyers and sellers meet. Buyers incentivized to pay the lowest possible price, sellers incentivized to get the highest price, and liquidity providers incentivized to connect them and to close any arbitrage gap. It is a beautiful system that works in real-time every single trading day.
By prohibiting new and novel funds that would give investors exposure to private assets, regulators are giving investors no choice but to access inferior fund structures at prices that can’t be validated.
Lifting the illiquid bucket restrictions would allow innovators to compete on the merits of their solutions, with investors using those solutions to access better, cheaper, and more liquid funds for their private asset investments.
Thank you again for the opportunity to share these comments and for the transparency of your process.
Phil Bak
CEO, Armada ETF Advisors LLC
why would one call them listed private assets? I assume that once listed, they become public assets, as most companies and other assets who were before private, become public when listing them.. Please explain, as it sounds as an oxymoron.