Private fund assets have increased roughly threefold over the past ten years, a recent Morningstar report found. This growth has outpaced the more than twofold expansion of the public market.
As companies remain private longer and achieve high valuations, fund managers have shown interest in offering customers exposure. There has been a steady development of interval funds and other semi-liquid products. This trend has extended into the highly liquid exchange-traded fund category.
"The ETF space is obviously more limited, because you don't have the same structural protections to own private assets as some of those other wrappers," said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar. "You can offer exposure to private assets — it just can't be a really substantial portion of the portfolio."
The small number of ETFs in this category have offered relatively small allocations to private markets. This is a consequence of the SEC's 15% limit on illiquid holdings. For retail investors who otherwise could not access private credit or private equity, this may be sufficient.
State Street Investment Management sought to tap into that demand last year by adding two private credit funds: the SPDR SSGA IG Public & Private Credit ETF (PRIV) and the State Street Short Duration IG Public & Private Credit ETF (PRSD). These products have about 20% exposure to private credit, circumventing the 15% limit by having Apollo provide liquidity. The company has stated both outperformed their benchmarks last year and should be considered core bond holdings rather than just private-credit vehicles.
Private equity is probably a more alluring category for retail investors than private credit, Armour said. But there are few ETFs with private equity holdings, and there are some important considerations for investors thinking about those, he noted.
The $1.6 billion ERShares Private-Public Crossover ETF (XOVR) has 10% of its assets in SpaceX, through a special-purpose vehicle. That fund received a lot of attention and flows last year, as it is perhaps the only US ETF with SpaceX exposure. But it's unclear how ERShares values the SpaceX holdings, and special-purpose vehicles can have high fees that don't necessarily need to be disclosed to ETF investors, Armour noted. ERShares did not respond to a request for comment.
The $90 million Baron First Principles ETF (RONB) is different, in that it holds Elon Musk's xAI directly, Armour said. However, the issue of private-equity valuation remains. That ETF has less than 6% of its assets, or $5 million, in xAI, according to the firm.
Asset managers have recognized that both private markets and ETFs can require investor education. They have been rapidly hiring product and portfolio specialists as they build out in those areas, according to a report last week from Cerulli Associates.
"When people talk about private equity, they think it's like Steve Jobs in his garage with Apple, but in many cases these are huge, late-stage companies," Armour said, with the examples of xAI, Anthropic and SpaceX being the size of top 40 US public companies. "You're not like a venture capitalist, buying private equity in an ETF."