Last month at the Exchange conference in Las Vegas, Anna Paglia, State Street Investment Management’s chief business officer, discussed how the firm’s private credit lineup came to be and how the firm sets about developing some of its products.
Key Takeaways
- SSIM is scaling its private credit ETF suite by partnering with an industry leader like Apollo Global Management to provide retail investors with institutional-grade yields and backstopped liquidity.
- The firm has successfully wrapped illiquid private credit assets into a liquid ETF format and as such is well positioned to capture surging fixed income flows.
- SSIM takes a client-centric approach, reverse engineering products from client needs and requests and partnering with best-in-class external experts when it makes sense.
SSIM launched the first-ever private credit ETF, the State Street IG Public & Private Credit ETF (PRIV), in partnership with Apollo Global Management a little over a year ago. The fund has since gathered more than $800 million in assets under management. Similar products targeting the short duration and ABS segments of the private credit space have followed in the intervening months.
Building a Private Credit ETF Family
VettaFi: Please tell me about how State Street Investment Management launched the first private credit ETF and has gone on to build a family of three ETFs. What was the decision making behind that?
Anna Paglia: It’s a suite – it’s part of the same concept. When we started our partnership with Apollo Global Management about three years ago, these products did not launch from day one. There was a lot of planning. And when we started talking about this partnership, it was not really about a single product. There was an overarching theme of private markets, in particular, private credit, which still commands higher premiums and delivers a higher yield than the public part of the debt market.
Our vision [asked]“How do we bring that segment of the market to the hands of wealth advisors and retail investors?” [We knew] there must be a way to do that with diligence and rigor. We identified a few strategies. The first one was credit, as Apollo is a market leader when it comes to private credit.
Partnering With the Best in Class
VettaFi: How does that relationship with Apollo work?
Paglia: We created this partnership that is about sourcing and liquidity. We wanted a fund that could get access to those assets sourced or originated by Apollo because we have pretty high confidence in the ability of the firm. Apollo also gave [the fund]liquidity. The SEC asked us to make our contract public — all the terms of our contract [are]now in the public domain. [It shows] we have this backstop liquidity from Apollo that really gave us the confidence that in a period of market distress — even if we were not able to sell those assets elsewhere in the market — Apollo would step up and buy assets from us.
That was not the only criteria to assess liquidity, but it is definitely a stronger feature of the State Street IG Public & Private Credit ETF (PRIV). Then we were in the market for a few months [with PRIV]when our clients suggested we bring the same portfolio with a shorter duration, and we thought it was a great idea. This is how the State Street Short Duration IG Public & Private Credit ETF (PRSD) was born. It’s the same construct — the public and private, Apollo originated, with the backstop liquidity — but the duration for this is shorter.
Then we looked at other segments of the private markets that were not represented in the space and where there is an opportunity for clients to diversify. This is how the concept and the idea for our ABS portfolio was born. It invests in asset-backed securities. It takes you away from corporate balance sheets, and it gives you access to a segment of the market where the ETF representation is limited — you don’t have many very specialized ABS products. We thought we had an opportunity to really build a complement to PRIV and PRSD with the State Street IG Public & Private ABS ETF (PRAB).
It’s not like you use one or the other. It’s really about providing optionality to clients. If you want to have exposure to the private segment of the market, now you have options with private credit with ETFs, longer duration, shorter duration.
It’s not going to be the end of it, because we are really happy with the partnership with Apollo. And Apollo seems to be really happy with the partnership with us. We share one common objective, which is democratizing access to private markets. We are going to continue to build and add to the franchise as we continue to hear from our clients and get their leads on what they want to see. Right ETF for the Moment
VettaFi: What is the appetite for private assets in an ETF wrapper in this kind of market, where there’s a lot of global uncertainty and a war unfolding?
Paglia: The conflict is moving the flows into fixed income. If you look at the big picture, fixed income flows in the last year were one-third of all industry flows. Now, in the first two weeks of March, those flows were as high as 50% of new flows in the market. That tells us that investors are trying to de-risk and move away from equity markets. They are investing now in fixed income markets.
Within the fixed income segment of the market, we are hoping that investors will appreciate that you can have the same risk profile by having a segment of a portfolio invested in private markets. What we are doing with PRIV is very simple. You have a portfolio that has the same risk-adjusted profile as a traditional fixed income portfolio. That is very similar to the Agg, [but]with the yield of privates. As flows into fixed income continue to accelerate, we believe that private assets will continue to catch the attention of clients.
Focusing on Client Interests
VettaFi: SSIM has a long history of collaborating with other firms for fixed income exposure. That’s resulted in partnerships with firms like DoubleLine and Nuveen — and now Apollo. Is that a strategy to harness the expertise of firms that lead in different areas of fixed income investing?
Paglia: Yes, but with a footnote. [We] never build a product by looking at our capabilities and then saying, “This is what we want to build, only because we can do it.” We always think high. We always think large. We always think big. What is that one tool that would benefit our advisors, our clients?
We are a firm that historically has only served institutional investors, and over the last few years has become more and more prominent with wealth advisors and retail investors. We look at all those channels. Then we always ask ourselves, “What type of products would now benefit the needs of those clients?” And then we reverse engineer from there.
We think about, “Is this a capability that we can offer ourselves?” I’ll give you an example. Two years ago we launched MyIncome suite, which is a suite of defined maturity fixed income portfolios. It is actively managed, and it is managed by our fixed income team. We have the capabilities; we have the history managing fixed income. That was a capability that did not need to be outsourced.
But for other things, when we know we don’t have best-in-class capabilities, we are really open to joining forces with others. [With] Apollo, we looked at private credit and we said, “The leading provider of private credit is Apollo.” In our partnership with Blackstone [we asked], “Who is best in class in senior loans? Blackstone — let’s partner with them.” Digital assets? We partnered with Galaxy, that is a crypto [expert].
The goal is always to provide the best outcome for the client. Then we reverse engineer from there, not the other way around. That’s the mistake that maybe some asset managers make, which is, “Let’s see what we are really good at then push products based on that.”
What we think doesn’t really matter. The only thing that matters is what our clients think and what they want. And if we can build it, then we are going to flourish as a company. We are going to benefit. If we tell clients we cannot build it, they’re going to get it somewhere else.
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Originally published on ETF Trends
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