The notion of a fully private credit exchange-traded fund, a product that could democratize access to an asset class typically reserved for institutional behemoths, faces significant hurdles, according to BlackRock, the world’s largest asset manager. While the allure of private credit’s historically higher yields and lower correlation to public markets remains strong, translating its illiquid, bespoke nature into a daily-traded, transparent ETF structure presents a paradox that even BlackRock acknowledges as a profound challenge. This isn’t merely a technical quibble; it’s a fundamental clash between the very essence of private markets and the regulatory and operational demands of the ETF wrapper.
One of the primary sticking points revolves around valuation. Unlike publicly traded bonds or stocks, private credit deals are not marked to market daily. Their values are determined periodically, often quarterly, through complex processes involving models and expert judgment, rather than real-time trading. For an ETF, which requires continuous pricing and liquidity, this creates an immediate disconnect. An ETF is designed for investors to buy and sell shares throughout the trading day, implying that the underlying assets can be priced and traded with similar frequency. Without a transparent, real-time valuation mechanism for private credit holdings, an ETF would struggle to maintain an accurate net asset value (NAV), potentially leading to significant deviations between the fund’s trading price and the true value of its assets. This “stale pricing” risk is a non-starter for regulators and a nightmare for investor confidence.
Furthermore, the very illiquidity that often contributes to private credit’s return premium is anathema to the ETF structure. ETFs are built on the premise of efficient creation and redemption mechanisms, where authorized participants (APs) can exchange large blocks of ETF shares for the underlying securities, and vice-versa, to keep the fund’s market price aligned with its NAV. In a private credit ETF, an AP attempting to redeem shares would effectively be asking for a slice of an illiquid loan portfolio. The fund would then face the daunting task of selling off portions of these loans, potentially at distressed prices, to meet redemptions, especially during periods of market stress. This could lead to a “first-mover advantage” problem, where early redeemers get out at a better price than those who wait, or even force the fund to gate redemptions entirely, undermining the very promise of an ETF’s accessibility.
Regulatory bodies, particularly the Securities and Exchange Commission (SEC) in the United States, have historically been wary of illiquid assets within daily-traded funds. Their primary concern is investor protection, ensuring that retail investors, who largely comprise the ETF market, are not exposed to undue risks or liquidity mismatches. While semi-liquid structures like interval funds or tender offer funds have gained traction for private credit, providing periodic liquidity windows rather than daily access, these do not fit the traditional ETF mold. BlackRock’s assessment suggests that without a significant paradigm shift in how private credit is structured, valued, and traded, or a dramatic reinterpretation of ETF regulations, the fully private credit ETF remains firmly in the realm of theoretical construct.
The ongoing discussions within the industry are less about whether private credit will continue to grow – it undoubtedly will – and more about the practical limits of packaging such an asset class for broader consumption. While innovation constantly pushes boundaries, BlackRock’s cautious stance serves as a powerful reminder that not all financial products can be shoehorned into every wrapper. The intrinsic characteristics of private credit, its bespoke nature, its long holding periods, and its infrequent valuations, fundamentally conflict with the real-time, liquid demands of a true ETF, leaving a gap that even the industry’s titans find challenging to bridge.
