1. What is a Private Credit ETF?
A Private Credit ETF is an exchange-traded fund that provides investors with access to private credit markets. Private credit refers to loans made by non-bank lenders to businesses, often with higher yields than traditional fixed income assets. Unlike direct private credit investments, which are typically illiquid and have long lock-up periods, a Private Credit ETF offers liquidity by trading on an exchange, making it more accessible to retail and institutional investors.
Investors can gain exposure to private credit through ETFs that hold publicly listed Business Development Companies (BDCs) or traditional offering memorandum (OM) private credit funds. BDCs, which are publicly traded, invest in private debt by providing financing to small and mid-sized businesses, often through senior secured loans, mezzanine debt, or equity stakes. Some ETFs specifically focus on BDCs, offering diversified exposure to the private credit market. For example, the INCM Private Credit ETF by Accelerate provides investors with a diversified, high-yield income solution through a mix of private credit and fixed income strategies.
2. What is a BDC?
A Business Development Company (BDC) is a publicly traded investment company that provides capital to small and mid-sized businesses, usually in the form of private loans or equity investments. BDCs are required to distribute at least 90% of their income to shareholders, making them attractive for income-focused investors. They function similarly to private credit funds but are regulated investment vehicles with greater transparency.
3. Why a Private Credit ETF vs. Traditional Private Credit?
- Liquidity: Private Credit ETFs trade on exchanges and offer intraday liquidity, while traditional private credit funds often have multi-year lock-up periods.
- Accessibility: ETFs allow retail investors to access private credit markets without high capital commitments or accreditation requirements.
- Diversification: ETFs typically hold a basket of private credit BDC funds providing broad diversification and exposure to broader loans then picking a traditional private credit fund.
- Lower Fees: Traditional private credit funds often have high management and performance fees, whereas ETFs tend to have lower expense ratios.
4. What Happens When a Private Credit Fund Gates/Locks Client Capital?
Unlike traditional OM private credit funds, ETFs cannot impose redemption “gates” or lock investor capital, ensuring daily liquidity for shareholders. This makes ETFs an attractive option for those seeking exposure to private credit without the risk of withdrawal restrictions during market stress.
5. What Are the Liquidity Periods of a Private Credit ETF?
Unlike traditional private credit funds, which often have quarterly or longer redemption periods, Private Credit ETFs offer daily intraday liquidity, as they trade on public exchanges.
6. Should You Invest in Private Credit?
Investing in private credit can be attractive due to higher yields, portfolio diversification, and reduced correlation with public markets. However, risks include illiquidity, credit defaults, and economic downturns impacting borrower repayments. A Private Credit ETF can offer a more liquid and accessible way to gain exposure while mitigating some traditional private credit risks. The INCM Private Credit ETF by Accelerate is designed to provide investors with diversified exposure to private credit while maintaining liquidity and capital preservation.
