The Apollo ETF Landing

Published Sep 26, 2024, 8:00 AM

A new competition has begun to see who can successfully solve an investing paradox: how to package illiquid, private assets into liquid, public exchange-traded funds. State Street, in partnership with Apollo, officially kicked off this race with a recent filing. If approved, their offering would make one of Wall Street's fastest-growing corners—private credit—open to a much wider world than just institutional investors.

On this episode of Trillions, Eric Balchunas and Joel Weber speak with Vildana Hajric, a cross-asset reporter at Bloomberg News, about the details of the filing, why more filings are expected, what to know about Apollo’s “liquidity backstop” and why all of this is such a potential game-changer. 

Well can a trillions.

I'm Joel Webert and I'm Eric Belchernis.

Eric.

There's this universe that we've really never talked about on trillions because there haven't been ETFs to really talk about. But it's called private credit. Private credit is kind of post financial crisis. It has only gotten bigger. There's a lot of non bank institutions that are big names. They have a ton of money. The growth has been really interesting, and now it looks like they're starting to I the ETF world.

Yeah, I always think of private credit and private equity, which I think collectively are in the ballpark of thirteen trillion, as sort of like the stuff only people in the know can get, you know, like the party, the real party. That's the institutional Yeah, that's in the back by the pool, not the party for the plubs. And so a lot of these firms our intermediaries in this area, and the end user is typically large institutions, acid owners who have a ton of money, pensions, endowments, hedge funds. There's been a couple news items in the past year that show a lot of people trying to democratize this.

Whoever can bridge the.

Gap between all that private stuff and the retail investor is probably going to make out big time. So the incentive to bridge that gap is there and enter ETFs. Everybody likes their stuff in ETFs. So there's this sort of race for the prize right now with these issuers, including black Rock, to say, how can we get this it's a paradox. How can we get this totally i liquid thing into this vehicle that is very liquid? And this is the puzzle that the issuers are trying to solve. And there is an interesting design put forward in the past couple of weeks by State Street and Apollo, which really was earth shattering. I've talked to people in the and this got people buzzing. You know, we saw a couple of filings right after. So there's going to be this sort of race. I'll ave the bitcoin race to get there first.

All right.

To help us talk about that race, we're gonna be joined by vil Donna Hirik, an ETF reporter with Bloomberg News, this time on trillions saving private assets.

To Donna, welcome to trillions.

Am I allowed to laugh?

Yes, yes you are.

That was Eric's idea.

You know, first of all, we just want to say first time officially on the show. We've talked about you and your reporting before, so thanks for being here and looking forward to having you on.

By the way, it's not possible this is your first time.

I am yeah, just after that's good.

Sort of like you know, like what is the universe expanding into? I can't get my mind around that. I can't get my mind around the fact that you haven't been on, Like it just doesn't make sense.

I've known you for almost seven years now.

Thanks for the So.

We're paying it forward.

We're going to hear from you much more often now, So talk to us about this race and what it looks like so far.

I actually really like Eric's comparison to the bitcoiny tf hrase because so we have this filing from Apollo and State Street. Everybody's trying to figure out how to make private assets which aren't liquid, which are not liquid, so they're illequid.

Exactly.

They do not trade as as often as the SEC would need them to be trading in order for the SEC to say that they are liquid. Because what the SEC says is something is illiquid if you cannot sell it within seven days, and with a lot of this stuff, that would be really hard to do with the bitcoiny tf hrase, it took years and years. It took longer than a decade before Blackrock came out with their filing and said, Okay, we're going to have this survey. It was called the Surveillance Sharing Agreement, and everybody said, huh, okay, Blackrock figured out a way to potentially make the BITCOINYTF happen the same type of thing. How and here with Apollo in State Street where they came out with their filing and people said, Okay, potentially this is a way to make the SEC happy when it comes to providing quote unquote ill liquid stuff to the broader public in the ETF wrapper because as Eric said, everybody wants ETFs. Everybody wants the retail share of this because retail just hasn't been able to buy into this stuff. And I said, quote unquote illiquid because we can talk about how actually this filing is structured and whether or not it will make the SEC happy before.

We do that.

What else happened after this Apollo State Street announcement, Well, there.

Was just a lot of questions on Okay, what's the trick here, because there has been a couple like quote private ETFs. But what they tend to do is they invest in closed then funds or BDCs which have connections to private credit. But that's using that's a indirect. Then there's ones that say, okay, we're private dec we will invest in microcap stocks that have similar characteristics. So everything so far has been indirect. This is the first one saying we're gonna give you the real deal. And we know from the bitcoin race people don't want the derivative or the indirect. They want it the real way.

I want what they get.

Yeah, I want the same thing, and so the apollo is the is the difference here. They're huge in this industry, their name is on the label, and they're gonna basically make a market in the private credit portion of the portfolio. They promise to buy it back if there's a selloff. That's that's I mean, that's a liquidity backstop. That's major. And that's the puzzle that State Street has solved. Now how much is actually private credit? This is a baby step, but I think people will respond favorably this because remember, all the advisors out there can't really get this. So they can say to their clients, hey, I'm getting I'm getting you to the real party.

Yeah.

Yeah, And then they're gonna get it through this ETF, which anybody can get, but they'll they're gonna make a show of it, and it's it's gonna work.

Has anybody ever attempted anything like that backs up before?

No.

I mean, the only thing that was somewhat similar in my view is the non transparent active structure where some of them were in like brought blind trusts and some were even proxy portfolios, and market maker sort of had to figure their way out not having all the information or having it fed to them in certain ways, and they work fine. And one other thing I'll say about why I think this will be no big deal is that, let's just say, even the fifteen percent that's completely a liquid goes completely a liquid. The ETF still trades, and in March twenty twenty, when COVID happened, there was a ticker called hyd which was Vanak High Yield Municipal Bond, And to me, this is the canary in the coal mind. It traded at a twenty nine percent discount to nav sometimes and today it's taken in a billion dollars since then, and it trades just as much. In other words words, I think people really have a lot of trust that the ETF industry will not do them wrong. And then if the price is a little below NAV, that is the best price I can get based on the incentive to arbitrage, and possibly they'll even go the NAV probably isn't even right. Then they trust the ETF that much, and HYD to me proves it. So I think the audience is certainly ready. It's the question is the SEC approves it or not. But I think it's a really good idea, and I like the idea of getting Apollo into the industry, you know, to have them involved is also maybe it's a.

Big Wall Street name to not be in the mix they'll done. And we should actually be pretty clear about this. We don't totally know the mechanics about how these things will work. But what do we think that this Apollo State Street ETF would hold.

So the perspectus says it would be eighty percent investment grade stuff and twenty percent potentially high yield stuff. However, and this is another one of those outstandings questions. State Street it looks like is able to say XYZ is investment grade, so they are able to do that, and it's unclear whether or not you'd actually have a ratings agency involved to be able to say, okay, yes, this is investment grade. So another outstanding question on that front.

Who else has expressed interest in joining the race?

So there's a couple of other filers. One is an issuer named Bond Blocks. They filed for Colo ETF, which actually is a little bit different from what we were talking about with Apollo and State Street. But I really would say the Apollo and State Street ETF is the big one, not only because they were the first ones to put out the filing, but also because we're talking about two really big Wall Street names. And I want to go back to what Eric was saying about the fifteen percent. So the SEC requires illiquidtive investments to be capped at fifteen percent for a fund. Thinking, according to some analysts and strategists and people who are watching this race is that State Treed and Apollo might not necessarily need to be sticking to the fifteen percent cap, because if they were needing to stick to the fifteen percent cap, they would have already filed and launched such a product by now. And I actually want to give some analysts at morning Star credit for this. The way that they were looking at the prospectus and analyzing it is that they are thinking that really stay treat and Apollo might not need to be sticking to that cap. Of course, we just still have just the one filing so far, so we'll probably be learning more information in due time.

So this is something I missed, and I got to give Brian Moriarty and Ryan Jackson, who are morning Star. They wrote a great piece on this. I learned a lot, to be honest, I thought the fifteen percent was all they could do, but I see your point point. If they can say that it's liquid because Apollo's there, then you can go beyond the fifteen percent.

Exactly. You have to remember that like every day, the.

Japan ETF has its underlyings frozen like every single day. Then there's been cases like Egypt where the Arabs spring, the Egyptian stock market closed for three or four months.

And EGPT traded on.

So even if eighty percent of it was private and got a little rough or even frozen again, it would trade like a cloth then fund. But if Apollo's going to step in and give a market, that wouldn't even happen. So I guess it's a leap of faith. But Polo is a huge firm and oother thing. If the question is, well they buy it back in a crisis, right? First of all, I've known that ETF investors tend to not go they're pretty diamond handsish. They tend to not sell a lot when the price goes down or maybe ten percent of people, so no big deal. But let's just say eighty percent ran for the door. Apollo might be smart enough to know that's when you should buy it. You know, institutions know you want to buy STUFE when it's.

In a fire sale.

So they may be happy to take the private credit all retail's hands after it has a downturn and buy it on the cheap.

You know.

So there's a couple we don't know they're thinking here. The question morning Star Rose, and I don't know the answer totally is what does Apollo get out of this? Do they get a cut of the expense ratio.

As some people the restrant? I mean, they're taking a ton of risk here.

Yeah, so maybe, but do they really need that money? You know the private business that they're all yeah, you know, millionaires and billionaires.

Do they really need this?

Somebody theorized that Apollo was doing this so they could dump the less desirable stuff onto retail, sort of like exit liquidity. But I would hope that State Street being a fiduciary and being part of this, and their name comes first. By the way, would you know, make sure that they're a check and balance on that. This is again a question that has no answer yet because you can't get these people to talk about their filings until the ATF comes out.

Yeah, so there's those questions plus a bunch of other ones, and we have critics sort of pointing to a bunch of the gaps in knowledge in terms of what we know how this ETF would potentially work, and we're likely to find out more information as time goes on. What we do know is just looking at the prospectus, is Apollo would be originating and pricing the stuff, It would be selling it to Stage Street, and then it would also be buying it back if Stage Treat asks it to. And then the filing also mentions a daily limit in terms of what Apollo would be buying back, and we actually just don't know what that amount would be, whether or not it would be a dollar amount or a percentage. So, for instance, if they're buying back a million dollars worth of stuff or ten million dollars worth of stuff, what happens if the fund grows to a billion dollars in assets and then Apollo is buying back just one million. Still, So those are some of the outstanding questions, And again I want to give credit to morning Star for pointing this one out as well as they did in one of their analysis pieces recently.

To be clear, here, they've filed, Now how long are we waiting? How long was bitcoin? The Bitcoin raise?

Well, this is different because it's not a thirty three act, it's a.

General Well we're just saying worst case scenario.

Yeah, okay, best case scenario seventy five days minus ten, which we already went through, so like sixty five days that would be if it gets approved. When you file something, the SEC either says something and you have to rejigger the filing or they say nothing and it just goes.

It goes through. So my guess is the SEC will call them and work something out. Maybe they'll have to tweak stuff, but.

If the SEC is fine as is, it will just launch in sixty five days or so, and there we go.

So when this happens, we will be talking about it again. I'm very curious about how they answer some of these technical questions.

One thing that should be pointed out is that up until now, when people had this idea of private credit or private equity, they've gone to these interval funds, which are like mutual funds, but you can only get in and out like quarterly or every half year, and they thought, Okay, this is the better vehicle for this type of ill liquid investment.

The problem is nobody wants this.

It's like putting music in an eight track cassette tape, like, yeah, it could be the best song, but like, no one's gonna go just the vehicle to deliver it is so bad. Interval funds the average fee is like one point five percent. The fees are so high in these things. The returns aren't great.

I'm, you know, not to say what.

They should benchmarked against, but I just sorted through them, and I'm like, I can sort of see why people don't want interval funds. Kathy Wood has one for ARC that she does private equity investing in that's an interval fund, and nobody really cares. And this came out around the arc hype. So I think when people say, well, this should be in a different fund, I'm like, I don't know. ETFs are where it's at. So I do see the need to get it in here. And again, what people won't mention, and it has not been mentioned even in the Morning's article, is trust. You know, people underrate how much investors trust the ETF world because take out some of these senior loan ETFs like BKLN. Some of these things don't settle for like a month, and in the high yield HyG is so super popular, most of those bonds don't trade every day. So we have a lot of experience putting in liquid stuff into an ETF and everybody seems fine with it in order. And when I say fine, they trust arbitrage to do its thing and deliver them a price that's about fair minus.

What the arb person needs to make a little money for themselves.

But one of the things that's providing trust here is the name State Street, which is a name that everybody knows. In ETF world. We often talk about, you know, is there a zone here that vanguard or the black rocks of the world can't touch if if State Street and Apollo show so that you can do this, how protected is this space? Is there going to be a feeding frenzy and you're going to see the Vanguards and the black Rocks come in and try and find partners.

It's interesting Vanguard did partner with the private equity firm because they Vanguard's also an advisor, but they didn't put a fund out that was private equity. But Vanguard has tiptoed in this area for sure. I don't see them doing anything like this. They don't need this, you know, the fisher jumping in the boat. They're not structured the same as everybody else. Blackrock is like always.

On the hunt for new revenue streams. I mean they are relentless. They die for every loose ball.

I bet there are whiteboard meetings at Blackrock as we speak trying to figure this out. Blackrock recently brought Prequin, which a lot of people thought was to get into this business, and I think was it Larry Fink or somebody at Blackrock said we want to democratize private markets.

The other interesting thing is that it is State Street and they have a new head of ETFs Anapaglia, and it seems like they're taking a bit of a shift towards the type of stuff that they're willing to put out. So since she's joined the firm, they actually have put out filings or even put out crypto ETFs, so it looks like they're looking to do more with that. They also partnered with Galaxy, a crypto firm that used to work with in Vesco where she came from, and now we have this filing as well, So it seems like they are looking to like Eric mentioned with Blackrock, they're going after revenue. Potentially We're seeing sort of changes at State Street as well, like State treat is known for spy, right, so there's sort of new innovative stuff that they're looking to do.

Yeah, and Pagalley is a great point because she is a a go getter, she's an ETF person, and if they're giving her the keys to run the business, I could see I get why they did this. I could see more of this kind of stuff coming down the line. You know that matters because we've seen companies where in ETF person with that kind of verve is driving the boat versus when they leave and then they put somebody from like another department or the mutual fun area. It all just slows down and it's all prevent defense again. But an it to me is aggressively an offensive minded persons industry.

There's there's new blood at Vanguard too, so this whole space will be an interesting one to watch.

To me, it's just different because you've got this major player in the space providing liquidity backstop in Apollo that is huge. And State Street, by the way, has had success in the past. They did this State Street Double Line ETF with Jeff Gunlock and that was successful. Gunlock now launches Double Line on his own, but that was, you know, his first foray. So State Street has done this in the past teaming up with somebody. So I'm excited, Joel. You know, I I just spent a long time on the planet Crypto and ready to move. Yeah, or new planet was a new universe because I got out before they got me.

Yeah, yeah, they almost got me. They almost got me.

You're gonna get Twitter hate for them.

Sometimes when I when I've gained so many these crypto followers that when I tweet about like fixed income or something like, yo, what's this?

Do you know?

What they would call you in crypto land tourists.

Yeah, they called me they called me in James, the Bloomberg boys. Ois, they call me a suit they call me a boomer. I've heard it all trad five bro. All those are true?

And how much of it is true?

Yeah? Wall Street The other guy called me elite Wall Street guy.

Yeah.

I'm like, all right, I like that.

All right, So you're giving you're giving up the crypto space is the headline.

No, I told people it would be percentage of it would be a ten percent of my life.

It went it was like ninety. But it was always going to diversify away credit. It's hard to leave it alone because they're still growing assets.

You've changed bild.

I got one more question for you, which is that we often ask I guess on trillions, what is your favorite ETF ticker?

Oh? My god, I love tickers. Do I have a favorite. I'm obsessed with tickers because I think that there really are people who sit at issuers, who sit around and think about what is going to be the best ticker to attract retail or whoever else. And then you have some like really serious players and they'll come out with a really good catchy ticker. I know what Eric's is. Tok, right, that's your favorite ticker. No, you've tweeted about it before.

It is. It is a great top tier tier one ticker.

Yeah, it's a good one.

So you you really have me on the spot. But so for example, b.

R r r burr, Yeah, money printer goes burr money printer.

That's a really good one. That's for one of the bitcoiny tfs. But then you had black Rock recently come out with like an infrastructure fund and the ticker is made m A D E made And you know.

It's so simple though, it's like so good's good.

Well they have Jay Jacobs who is a global x and they are tickers specialists.

Yeah, they I just I love tickers.

Can I think about it, I'll get I'm back with another.

This is me assuring that I'm coming back.

You've paid it forward. Yeah, exactly, So, don and thanks so much for joining us on trillions.

Don't have to say anything. Oh, thanks for having me.

Thanks for listening to trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify, or.

Wherever else you'd like.

To listen.

We'd love to hear from you. We're on Twitter. I'm at Joel Webber Show. He's at Eric Baltren's.

This episode of Trillions was produced by Magnus Hendrickson Bye

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