A high-stakes race is taking shape between major money managers including BlackRock Inc. and Invesco Ltd. to combine Wall Street's most trendy investment vehicle with its fastest-growing asset class.
The firms are among those signaling they want to offer access to private markets via ETFs, a tie-up with the potential to open the closed-off world to investors of all stripes. It could also channel fresh cash into an asset class struggling to keep the boom alive after years of breakneck expansion.
The challenge? Even these investing behemoths will need to overcome a slew of technical and regulatory hurdles before they can squeeze the likes of real estate and pre-public companies into the famous ETF wrapper.
"It won't be quite so linear as, well, go buy a bunch of buildings and smack them into an ETF," said Doug Sharp, Invesco's head of Americas and EMEA, who confirmed his firm is exploring the idea. "I would expect innovation in the space, but the path there is a bit less clear."
With private markets now worth more than $13 trillion and billions pouring into ETFs every month at the expense of old-fashioned mutual funds, the motivation to figure it out is strong.
BlackRock's $3.2 billion deal to buy Preqin, a provider of alternative-asset data, is part of the firm's ambition to "index the private markets," Chief Executive Officer Larry Fink said after the acquisition was announced in early July.
The world's largest money manager believes it can bring the principles of indexing and iShares — its ETF arm — to the industry, Fink said. Preqin competes with Bloomberg LP, the parent of Bloomberg News.
While it may not happen in the near term, "the ETF-like wrapper for private assets could be very important to investors in the future," Samara Cohen, BlackRock's CIO of ETF and index investments, told Bloomberg TV's ETF IQ this week. "We've given a lot of thought to what is the extension of our ETF and indexing capabilities that we've built into private markets."
What's Next?
Meanwhile, Apollo Global Management Inc., a $671 billion alternative-asset manager, has said it plans to sell private credit through retail channels including ETFs. Goldman Sachs Asset Management says it's mulling how a private-assets ETF might work.
The big challenge is figuring out the liquidity mismatch between the assets and the vehicle. As listed securities, ETFs change hands every second of the day in the cash market, in extended trading, and increasingly even overnight. In contrast, private investments are infamous for barely trading at all.
"By definition, alternatives are illiquid and ETFs, the whole core to it is liquid," said Marc Nachmann, Goldman Asset's global head of asset and wealth management. "I think lots of people, including ourselves, are thinking through how that could work."
While the resilience of fixed-income ETFs during the Covid crash alleviated fears over funds that hold less liquid assets, the scale of the mismatch with private investments would have little precedent.
The Securities and Exchange Commission puts a 15% limit on open-ended funds holding illiquid investments, defined as those that can't be sold in seven days "without significantly changing the market value of the investment." That effectively caps an ETF's direct private-asset holdings, meaning at present it can only hold a dollop of unlisted exposure.
Possible Strategies
One potential solution to the mismatch is via so-called synthetic exposure, whereby a fund wouldn't actually hold private assets but would contain swaps written against a private equity portfolio.
"Ultimately the swap still has to be valued based on some kind of mark every single day," said Dave Nadig, an industry veteran who says he's had countless conversations over the past two years with firms looking to create a private-assets ETF. "That makes this extraordinarily sloppy."
