Covenant Lite #16: The Fight to ETF-ize Private Credit

A $1trn retail opportunity that’s still barely out of the locker room

Apr 20, 2025

"The fight is won or lost far away from witnesses — behind the lines, in the gym, and out there on the road." - Muhammad Ali

Interval funds and non-traded BDCs like BCRED are dominating the private credit headlines. They’re raising billions, getting the platform placements, and locking in sticky capital. But there’s a new challenger making its way to the ring: the private credit ETF.

Smaller and scrappier, these ETFs aren’t throwing knockout punches yet—but they’re training hard—tuning their liquidity models, tightening bid/ask spreads, and structuring sleeves—waiting for their moment under the lights.

Currently, the sum total of private credit ETF assets is tiny: less than $200 million. This is a far cry from the $25 - 30 billion in Interval Fund assets or the $115 - 130 billion in Non-Traded BDC assets.

But the fight to bring ETFs to private credit is being led by 3 well capitalized groups—State Street / Apollo, BondBloxx / Macquarie AM and Virtus—each with a different angle, a different structure and a different strategy to sneak private credit into a daily-liquid wrapper.

In order to grow, ETF providers need to prove their value-add to the market. A big challenge remains the 15% Rule (SEC Rule 22e-4), which limits ETFs and open-end mutual funds to holding no more than 15% of their net assets in illiquid securities.

Since all private credit holdings would get tagged as illiquid, this means that any private credit ETF could only ever have a minority of its portfolio invested in the thing that it was supposedly selling: private loans.

This is obviously a problem. And each of the 3 ETF providers solve for this issue in different ways. Below I’ll profile how each approximate private credit exposure in liquid form—and then look to the future in this space.

🥊 Contender 1: State Street / Apollo (“PRIV”)

We’ll start off with a group that should be one of the stronger contenders over time: State Street / Apollo. State Street was one of the pioneers of the ETF space, launching the first US ETF (“SPY”) in 1993. Earlier this year, they partnered with Apollo to bring “PRIV” to market, benefitting from Apollo’s deep roots in direct lending and asset-backed finance.

PRIV is taking a conservative approach that blends liquid public credit with a modest slice of directly originated private loans. Currently, only 3% of the portfolio is invested in private credit, but they expect to be able to get to 35% over time. PRIV hopes to exceed the 15% illiquid limit through use of a complicated (and untested) liquidity backstop provided by Apollo.

So far, PRIV has somewhat stumbled out of the blocks—raising only $54 million as of March 2025. Investors have been turned off by the small allocation to private credit, which was necessary to comply with ETF rules. The yield of 4.5% is also light relative to the 10%+ type yields that can be achieved via interval funds or non-traded BDCs.

🥊 Contender 2: Bondbloxx / Macquarie (“PCMM”)

Bondbloxx is a newer entrant focused on building targeted fixed income ETFs. They’ve leaned into high-yield, emerging market debt, and now private credit through their PCMM launch.

PCMM approximates private credit exposure by investing in rated middle-market CLO tranches, which are ultimately backed by private credit loans. By focusing on CLO tranches that can be priced daily via independent pricing agents, PCMM can invest 95%+ of the portfolio in private credit-like exposure (unlike PRIV’s approach, which is capped at 35% direct private credit exposure).

Similar to PRIV, adoption for PCMM has been slow. Launched in December 2024, PCMM has so far attracted $108 million in fund flows. It offers a 7.3% yield.

🥊 Contender 3: Virtus (“VPC”)

The longest standing private credit ETF provider of the three, Virtus launched VPC in 2019 to provide yield-focused investors access to the BDC universe. Virtus is a mid-sized asset manager with $180B+ in AUM. While less flashy, they offer a direct, transparent strategy that invests across a portfolio of public BDCs to approximate private credit exposure.

VPC is able to offer diversified private credit exposure by essentially building a liquid fund-of-funds of BDCs. It offers the highest yields of the three (~11% distribution yield). Though with layered fees that detract from returns.

AUM of $35 million suggests that this approach to private credit ETFs hasn’t taken off either.

🔹 Why Growth Hasn’t Taken Off

The 15% Rule: SEC Rule 22e-4 limits ETFs to 15% in illiquid assets (i.e., loans that can’t be sold within 7 days at fair value).
Yield Gap: PRIV yields ~4.5%, PCMM around 7%, but interval funds and non-traded BDCs offer 9–11%.
Portfolio Dilution: ETFs must fill the rest of their sleeve with public IG bonds, CLOs, or listed equities to stay liquid.
Bid/Ask Spreads: Still wide compared to core bond ETFs given the small size and lack of trading volume of the existing offerings.

✨ Where Innovation Is Brewing

▶ Hybrid Wrappers: Interval Fund + ETF Share Class

Imagine an interval fund (which can hold 80–90% private credit) that also issues ETF shares you can trade on the NYSE. Like any interval fund, once a quarter it would offer to buyback 5% of total fund assets. But investors would be able to buy and sell the ETF share class of the interval fund daily.

You can buy/sell daily like an ETF.
But actual redemptions happen quarterly via tender offers.
NAV is published weekly or daily.

It gives you intraday liquidity without forcing the fund to be liquid. Think: BCRED meets JEPI.

Hybrid wrappers could become the future of semi-liquid access:

The ETF share class provides brokerage integration and easy purchase.
The interval fund core allows high private credit exposure with minimal regulatory friction.
Shareholders who need liquidity can trade on the exchange (like a closed-end fund), while long-term holders benefit from a more stable NAV and higher yield.

Expect at least one major asset manager to seek SEC exemptive relief for this structure in the next 12–24 months.

▶ Semi-Transparent ETFs

These ETFs delay full portfolio disclosure. They help protect trade data and valuations in low-liquidity strategies like private credit.

Doesn’t change the 15% rule.
But enables managers to run tighter, more creative strategies without front-running.
Useful for CLOs, structured notes, or even public BDCs where position timing is sensitive.

May allow sponsors to hold “moderately liquid” or level-2 assets with less pricing friction—especially when paired with liquidity lines or pre-arranged asset sales.

▶ Factorizing Private Credit

Using Preqin and other data sources, sponsors may create smart-beta versions of private credit:

"First-lien quality"
"Low default rate basket"
"Asset-backed senior loan income"

These wouldn’t be fully private credit, but they could offer synthetic exposure to key risk/return factors. Think:

ETFs built from BDCs, CLOs, and public loans, weighted based on modeled private loan behavior.
Benchmark-style indexes that serve as performance anchors for portfolios that otherwise lack daily pricing.

This approach won’t replace real direct lending—but it could help democratize the factor exposure of private credit.

🔮 Outlook

Private credit ETFs are tiny now. But innovation is happening across wrapper design, data modeling, and liquidity engineering.

Don’t expect a flood of assets in 2025. But by 2027–2030, the next generation of ETFs might finally offer real private credit exposure with ticker-based access.

If that happens, this market won’t just grow. It will unlock a trillion-dollar shift in how private credit is distributed.

Covenant Lite

Covenant Lite