Why don't more private asset ETFs exist?
Exchange-traded funds (ETFs) hit the scene in the late '90s. Products from State Street, Vanguard, and BlackRock changed equity investing forever by giving investors diversification and the flexibility of continuous buying/selling in the market, with cost-efficiency versus actively managed funds.
How has this impacted the stock market?
On any given day the NYSE and Nasdaq trade $400B of combined volume, per each exchange's respective filings. Bloomberg estimates that trading of ETFs represents up to 40% of that daily volume.
A financial product going from $0 trading volume to $160B traded *daily* in ~25yrs = capital markets innovation.
So where is the next frontier of product innovation? Private markets.
I loved Matt Levine/Money Stuff's recent coverage of Apollo Global Management, Inc.'s new credit ETF. A link to the podcast is below.
What's happening?
- Well-known alt. investment firm Apollo is teaming up w/ State Street to offer an ETF that holds both public and private credit instruments.
- ETFs and mutual funds have a 15% limit on the amount of illiquid assets held.
- Private credit is typically considered 'illiquid', it doesn't trade on exchanges.
- Apollo has an in-house private credit trading desk that can act like a market maker, continuously buying/selling in the private markets.
- Apollo's desk can give the ETF a bid on each credit in the portfolio, providing liquidity and *possibly* enabling it to hold more than 15% in private credit.
An ETF that is mostly filled with private market securities would be innovative.
Is this a game-changer? Maybe.
How can this apply to other private assets like pre-IPO stock?
Pre-IPO index strategies exist. Our friends at Prime Unicorn Index, Destiny (D/XYZ), OPEN (OPENVC.COM), and Morningstar each have novel ways to track & access a diversified set of Unicorn companies. Destiny is publicly traded.
Using Apollo/State Street as a playbook, the missing ingredient to launching private equity ETFs seems to be having a large market maker.
A large asset manager providing continuous bids on Unicorn names like SpaceX, Stripe, Databricks is not farfetched. Caplight tracks $Bs of dollars in secondary market trades for these companies each year, so there is *some* liquidity.
So how far away are we from Unicorn company ETFs?
You tell me. But it feels pretty close. And Caplight is here for it.
DISCLAIMER: "This is for informational purposes only and does not constitute an offer to buy or sell securities. Any investment in private funds is speculative, carries risk, and is suitable only for those who can bear the loss of their entire investment. Private funds investments are illiquid, and shares will not be redeemable at investor's discretion. Investors should fully understand and be able to assume the risks associated with investing in private funds."
