How to Bring Investment-grade Private Credit to Any Portfolio With PRIV
Are you considering adding alternatives to boost portfolio diversification and income? Now, it’s easy for anyone to invest in an asset class that’s soaring in popularity — private credit.
Private credit’s $2 trillion market is now 10 times larger than it was following the Global Financial Crisis, when traditional lenders like banks retreated from the credit origination market due to increased regulation and capital requirements.1 And it’s expected to surpass $2.6 trillion by 2029.2
Historically, institutional investors have relied on private credit for its potential portfolio diversification, low correlation to public markets, and relatively high returns/yields.3 That explains private credit’s growing popularity — its ability to offer less correlated returns to public markets as well as the potential for enhanced income generation can make it especially attractive in today’s shifting economic environment.
Once available mostly to institutional and high net worth investors, the launch of ETFs like the SPDR® SSGA IG Public & Private Credit ETF (PRIV) democratizes investment-grade private credit access for all investors.
An actively managed fund primarily allocating to investment grade debt securities, including public and private credit instruments, PRIV seeks to maximize risk-adjusted returns alongside current income. Notably, PRIV may invest in private credit instruments sourced by Apollo Global Securities LLC, one of the world’s largest alternative credit investors.
What to Know About Private Credit
Private credit isn’t new. In fact, it was a major financing source for the 19th century railroad boom. More recently, growth accelerated sharply following the Global Financial Crisis when traditional lenders like banks retreated from the credit origination market due to increased regulation and capital requirements.
But this type of direct corporate lending isn’t the only form of private credit. The asset class has evolved over the past 15 years from privately negotiated loans between a borrower and a non-bank lender to a broader range of borrowers and funding structures referred to as Asset-Based Finance (ABF), which is backed by collateral for residential/commercial real estate, aviation equipment, music royalties, machinery, and consumer receivables, among other hard assets (Figure 1). This makes the potential addressable market for private credit between $30 and $40 trillion.4
Figure 1: Asset-Based Finance Ecosystem
Private Credit Isn’t Riskier Because It’s Private
It might surprise you that most of private credit’s addressable market is investment grade (Figure 2).5 And yet, the myth persists that private credit is issued to borrowers the banks aren’t willing to lend to.
In fact, ABF private credit features these important traits:
- Significant collateral backing provides downside protection in the event of a borrower’s default
- ABF’s self-liquidation feature through the amortization of principal payments through the life of the loan limits the potential for large principal defaults
- Stronger, more customized covenants to help monitor borrower stability and manage risks relative to public markets6
Figure 2: Private Credit’s Sizable Potential Opportunity
Private Credit’s Unique Income Appeal
Bigger picture, greater diversification across different sectors and companies contributes to the uniqueness of private credit. And, private credit has historically provided a yield premium to public markets.7
Through active management and the ability to invest across investment-grade private and public credit markets, PRIV helps investors pursue:
- High quality income without sacrificing credit quality
- Exposure to unique asset-backed investments across sectors not well represented in the public market
- Enhanced excess return per unit of risk relative to traditional core and credit fixed income strategies
PRIV’s Active Management Matters
PRIV is managed by the State Street Global Advisors Active Fixed Income Team. Using a risk-aware, macroeconomic top-down approach, combined with bottom-up security selection, they construct a portfolio that seeks to overweight the most attractive sectors and issuers across a wide opportunity set within both public and private credit markets (Figure 3).
Figure 3: PRIV’s Flexible and Diverse Opportunity Set
PRIV’s sector allocation, credit rating allocation, and sensitivity to interest rates will vary over time. Allocation decisions, where the fund can also own up to 20% in high yield securities, will be informed by the team’s proprietary long-term structural and intermediate-term cyclical views based on its analysis of macroeconomic factors, financial conditions, industry and sector trends, as well as rigorous fundamental and issuer-specific relative value research.
Our Active Fixed Income Team’s Investment Process
- Define Objectives and Constraints
• Assess desired risk, return, constraints, and other portfolio characteristics that define success - Establish Structural Portfolio
• Review long- term trends in economy, markets & policy
• Define estimates of fair value and correlations
• Establish desired positions if market is fair - Cyclically Adjust Exposures
• Assess current pricing in context of long run fair value
• Review business/inflation cycles, cash flows, & earnings
• Review supply/demand, positioning and momentum - Build Portfolio and Manage Risk
• Underwrite each individual security
• Select sectors and securities with desired characteristics
• Assess tactical opportunities
• Ensure no undesired risk exposures
How PRIV Accesses Private Credit
Through a contractual agreement with Apollo Global Management PRIV may invest in private credit instruments sourced by Apollo’s multiple unique origination platforms.
Apollo’s credit platform has had more than $220 billion of originations in 2024,8 supported by its credit business and broader origination ecosystem currently spanning 16 standalone platforms. Across those platforms, Apollo focuses on private credit origination, including both corporate lending and asset-backed finance.
Figure 4: PRIV and Private Credit Access
Adding PRIV to Portfolios
Record equity valuations propelling the traditional 60/40 portfolio’s recent run of double-digit returns have dropped its yield to just 2.68%, nearly 40% below both its long-term historical average and the rate of inflation.9 Today’s unusually high stock and bond correlations further challenge the traditional portfolio’s ability to generate income and balance risks. And this comes at a tenuous time when new macro risks threaten to boost inflation.
Investors have generally looked to gold, broad commodities, and real estate — with their low correlations to traditional assets — to balance the 60/40 and help temper the impact of a potential increase in inflation or volatility. Yet, most of those real asset alternatives don’t pay out income. That leaves income-seeking investors to allocate to below investment-grade rated debt, exposing portfolios to significant credit risks.
The launch of PRIV means all investors can easily access both investment grade public and private credit securities together in an active, transparent, and tradable ETF. When added to a traditional balanced portfolio of stocks and bonds, PRIV may offer all investors the potential for meaningful diversification beyond public markets, enhanced income generation from investment grade exposures, and improved risk-adjusted-returns.