At the Australian Wealth Management Summit in Sydney, industry leaders warned that efforts to wrap an inherently illiquid asset class in the world’s most liquid investment vehicle risk undermining both returns and investor confidence.
“We have to be careful when we talk about ETFs because we’re turning something illiquid into something liquid, and off we go,” said Stéphane Blanchoz, BNP Paribas Asset Management’s head of alternative solutions, at the summit on Friday.
“I’ve seen many initiatives to have a private credit ETF, and we’ve seen that in the US, but to me it’s not conclusive yet.”
Blanchoz warned that using an exchange-traded fund (ETF) to access a traditionally illiquid asset class could come at the expense of returns, making the structure risky.
“If you want to make the trade-off between liquidity and return, it’s not to go to the ETF market to find this type of trade-off. You’re going to have issues on fees, you’re going to have issues on other aspects of the trade,” he said.
“ETFs to me is a way to try to provide liquidity to something that should not be liquid by definition, and it’s going to be done at the expense of further fees so we have to be very careful.”
Remara managing partner Andrew McVeigh said the greatest problem was that private credit ETFs add layers of complexity between investors and the underlying loans.
“I think the question really is, who is providing the ETF? The challenge I see is that if it’s a traditional ETF provider, equity markets are very, very different to private credit markets,” McVeigh said.
“If you are providing a private credit ETF and you are not originating that private credit or you are not structuring that and sourcing that credit yourself, you actually have multiple layers before you even get anywhere near the asset class. To me that is not transparent at all. There might be good liquidity because there is a market maker there, so you can get in and out fairly quickly, but what are you actually invested in?
“Are you in Australian private credit, are you in US private credit, are you in European private credit? What is the return profile of that? And ultimately, there is a very substantial amount that is drained out of that return profile with friction costs for the recap of every manager from US managers to the Australian managers, to the market maker, to whoever is providing the ETF.”
McVeigh said the only model that made sense was if a local fund simply listed its existing private credit vehicle, rather than an ETF of funds that compounded complexity.
“If it’s an ETF of a fund that is here in Australia and essentially it is just a listed version of that same fund, that to me makes a lot of sense. If you are looking at a consolidated view of say US private credit, how many asset managers are in that, how many funds are in that, and then how many funds are in that?” he said.
Andrew Lockhart, CEO and managing partner at Metrics Credit Partners, was even more direct, warning that investors may be seduced by the promise of liquidity only to find themselves exposed to forced selling in stressed conditions.
“The best way you can generate returns is to reduce complexity. When you start adding complexity, you get unintended circumstances, one of the things that often happens is you think you’re getting liquidity, the next thing that happens is you find you’re a forced seller and your price is tanking. I don’t know why you would introduce that kind of risk.”
While ETF providers are cautiously moving into private credit, scepticism still outweighs enthusiasm among traditional managers.
As Blanchoz put it: “If you want to make the trade-off between liquidity and return, don’t go to the ETF market to find it.”
The wariness voiced in Sydney stands in stark contrast to Wall Street, where Apollo Global and State Street broke new ground in March with the launch of the first US-approved private credit ETF.
Their attempt to package direct, illiquid loans into a liquid ETF has exposed the structural challenge of liquidity mismatch.
In Australia, VanEck’s LEND falls squarely in the safer, listed approach, launched last year as the market’s first global listed private credit ETF, giving investors exposure to nearly 4,000 loans across 25 managers worldwide.
Betashares, meanwhile, has flagged its own more cautious push into private credit, starting with wholesale partnerships rather than a listed product.
