Are unlisted market ETFs on the horizon?
As investors and advisers look to up their private market allocation, a Global X head explores whether the asset class will soon exist in an exchange-traded fund (ETF) structure.
The democratisation of private assets has been a clear investment theme of 2024. According to Natixis Investment Managers, 34 per cent of global investors have demonstrated interest in private investment opportunities as a service they want from their adviser.
Research from Hamilton Lane also found that 70 per cent of advisers plan to raise clients’ allocations to the asset class. Performance and diversification were cited as the top drivers for the surge in demand for this investment area.
Moreover, BT and Preqin recently announced a partnership to provide advisers with greater education and transparency on private markets due to the rising demand.
While a variety of private credit and private equity funds are available to investors, a professional has questioned whether the asset class will soon be available through the ease of an ETF.
Chad Hitzeman, head of institutional sales at Global X ETFs, unpacked this topic on a recent Institute of Managed Account Professionals (IMAP) podcast episode.
“Index-based ETFs are omnipresent across all asset classes. The class where it’s operationally challenging to have an ETF wrapper over would be unlisted markets, such as private equity, private credit, which are resonating with investors at the moment,” he explained.
“There have been a few attempts to bring in alternative asset exposures through an ETF wrapper, but usually it’s done in an indirect or oblique way.”
Packaging up the complexities of unlisted market investment into the ETF vehicle could be a difficult endeavour, Hitzeman said, particularly due to the lack of liquidity in comparison to public markets.
“It’s going to be hard. You’re not necessarily going to have daily liquidity. That’s an issue that even unlisted funds have with private credit; being able to service redemption requests. But I wouldn’t put it past ETF engineers, so to speak, to concoct a way to achieve that – but there’s still work to be done in that space.”
While it is unclear when these types of ETFs may hit the market, the head of institutional sales noted more liquid alternatives in the ETF space that already exist for investors.
Hitzeman continued: “There are liquid alternatives available through ETFs already, such as Australian dollar gold, that might not be your first idea of what an alternative is. But to our minds, it does have alternative asset performance properties in terms of non-correlation, and it is pushed and pulled by different performance drivers than equities or bonds.”
VanEck also offers both a listed private credit ETF and a listed private equity ETF. The former is a portfolio of the 25 largest companies involved in private credit, while the latter is a diversified portfolio of 50 listed companies that provide exposure to venture capital and buy-out opportunities.
Amid the rising demand for the asset class, concerns have been raised about fly by night managers setting up private credit funds and why advisers should be wary when it comes to their fund selection.
AUTHOR
Jasmine Siljic
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