In recent discussions revolving around the integration of private credit into exchange-traded funds (ETFs), DoubleLine Capital’s Jeffrey Sherman posited a critical stance, firmly rejecting the viability of such a strategy. According to Sherman, private credit, defined as loans made to companies without going through traditional banks, does not align well with the open-ended structure of ETFs.
What Happened
Jeffrey Sherman, Deputy Chief Investment Officer at DoubleLine, argued during a recent investment conference that private assets, particularly private credit, should not be included in ETFs due to liquidity concerns and the mismatch in investor expectations. The structure of ETFs inherently assumes liquidity and transparency, characteristics that are often absent in private credit markets. Sherman suggested that the traditional characteristics of private credit—such as illiquidity, lower accessibility, and the longer time frames required for returns—are fundamental mismatches with the premise of an ETF, which relies on daily tradeability and straightforward pricing.
Adding to Sherman's perspective, DoubleLine highlighted the immense growth in the private credit market, which is expected to reach approximately $1.5 trillion by 2025, according to Preqin. This rapid expansion, combined with the corresponding investor appetite, further complicates the integration of these less liquid assets into a structure that promises immediate liquidity to investors.
Why It Matters
The sentiment expressed by Sherman is significant within the broader context of asset management as it challenges the ongoing trend of blending private assets into more liquid investment vehicles. The popularity of ETFs has surged over the past decade, with total U.S. ETF assets under management surpassing $6 trillion. However, the infusion of private credit could strain the fundamental principles of these investment vehicles, raising questions around valuation, pricing mechanisms, and overall investor experience.
With private credit’s robust growth trajectory, investors may be tempted to seek avenues that offer higher yields compared to traditional fixed-income investments, particularly in a low-rate environment. According to Bloomberg data, the average yield on private debt was approximately 8.4% in 2025, far surpassing the yields found in public debt markets, which hovered closer to 3%. Nonetheless, this yield premium comes at a cost; the inherent risk associated with private credit often outweighs the potential benefits for investors, especially within high-volatility market conditions.
Market Impact Analysis (include Fazen Capital perspective)
Integrating private credit into ETF structures could have widespread implications for market stability and investor returns. The unique characteristics of private credit—including extended durations and bespoke covenants—challenge traditional ETF pricing, which typically relies on price discovery through frequent trading. Without regular market prices, the underlying assets could become mispriced, resulting in investor discontent or worse, a liquidity crisis during periods of market stress.
From a Fazen Capital perspective, the analysis provided by DoubleLine serves as a critical reminder of the challenges inherent in blending disparate asset classes. While the allure of private credit lies in its potential yield, advisors and fund managers must carefully consider the market dynamics at play. The robustness of private credit may indeed enhance yield but risks creating misalignment with investor expectations surrounding liquidity and transparency. This schism could lead to investor disenchantment and diminish the appeal of these products in an already crowded marketplace.
Moreover, in light of recent trends observed in the markets—such as rising interest rates and inflationary pressures—investors need to remain vigilant about the illiquidity and potential credit risk associated with private assets. The integration of private credit into ETFs could exacerbate these issues and lead to greater market volatility.
Risks and Uncertainties
The primary risks organizations face when considering the inclusion of private credit in ETF products entail the liquidity mismatch, secondary market valuation issues, and regulatory scrutiny. Liquidity risk becomes pronounced when investors attempt to liquidate their holdings during unfavorable market conditions, exposing the potential for steep markdowns in asset valuations.
Additionally, transparency remains a prominent concern; unlike public market assets, private credits do not maintain a centralized exchange; hence market participants may struggle to independently assess the asset's value until evaluated at the maturity or exit phase. This opacity creates an additional layer of uncertainty for investors, which could deter potential capital inflows.
Lastly, regulatory parameters surrounding the integration of private assets into publicly traded funds will likely continue evolving. Enhanced scrutiny from regulators could impose further limitations or raise compliance burdens that standard ETF management structures may find difficult to navigate.
Frequently Asked Questions
Q: Why is private credit considered illiquid?
A: Private credit typically involves loans made to private companies that do not have a public market for their securities. This lack of a-market trading leads to significant limitations on the quick sale or valuation of these assets, rendering them illiquid compared to publicly traded securities.
Q: What alternative structures are available for private credit investments?
A: Many investors prefer private credit structures such as closed-end funds or private equity partnerships, which are more suited to the liquidity constraints and valuation challenges associated with private loans.
Q: How has the private credit market performed in recent years?
A: The private credit market has expanded rapidly, with assets expected to reach $1.5 trillion by 2025, driven by the search for yield in a low-interest-rate environment. However, performance can vary significantly based on sector exposure and credit quality.
Bottom Line
The interplay between private credit and ETFs highlights significant challenges that asset managers and investors must navigate. While private credit presents attractive yield opportunities, aligning these assets with the liquidity demands of traditional ETFs poses substantial risks. Investors must remain cognizant of the illiquidity, valuation disparities, and the evolving regulatory landscape as they consider their investment strategies moving forward.
Disclaimer: This article is for information only and does not constitute investment advice.
