DeFi Looping Comes to Apollo’s $1.3 Billion Credit Fund. What Could Go Wrong?

A common rule in investing is to always make your money work for you. Money at rest means money left on the table. But that mantra is getting put to the test with a new proposal from Apollo, Securitize, and Gauntlet, where holders of tokenized shares of Apollo’s $1.3 billion private credit fund can now use DeFi lending protocols to add extra layers of leverage. 

The numbers make sense, and it is an elegant solution. However, these types of funds are famously illiquid, and through reporting I discovered that one entity in this partnership (likely mistakenly) marketed this fund as having daily liquidity, when it is really only offered once per quarter.

Private credit is one of the major growth fields in all of finance, but investors should be very cautious adding exposure to an asset that is already very opaque and esoteric.

Today’s newsletter is brought to you by Mantle

Mantle bridges traditional finance and blockchain with products in the ecosystem like Mantle Network, mETH Protocol, and soon Mantle Banking, an all-in-one fiat and crypto account, and crypto index fund MI4. Discover Mantle’s vision for global, composable digital finance.

DeFi Looping Comes to Apollo’s $1.3 Billion Credit Fund. What Could Go Wrong?

The private credit market is expected to become a $3 trillion market by 2028, but it is famously illiquid and opaque. Here’s how tokenization can — and can’t — change that.

Private credit, a way of financing debt without using banks, was a $1.5 trillion market at the start of 2024 and is expected to become a $3 trillion one by 2028. Over the past few years, it has been one of the major growth sectors of the financial services industry. Aside from big banks stepping away from lending markets in the aftermath of the global financial crisis, private credit has shown to provide outsize returns to investors looking to further embrace alternative assets in their investment portfolios. 

Over the past decade, the market has provided annualized returns of over 9%, an impressive feat considering the near-zero interest rates endured during the throes of the pandemic.

However, private credit is not necessarily an easy market to understand or vet. Many deals are often negotiated bilaterally between a debtor, anyone from a small brick-and-mortar business to a Fortune 500 company, and the borrower does not issue any standardized form from the SEC like the S-1 filed by a company trying to sell stock shares on a public market.

There is clearly an inefficiency, and perhaps an insufficiency, in the market to meet investor demand for this growing asset class, which is expected to double again in the next few years. What's more, a new partnership in the world of digital assets is betting that some risk-forward investors will want to try and use leverage to stretch out gains from this seemingly outperforming asset class.

Announced on April 30, tokenization platform Securitize and risk management firm Gauntlet have partnered together to allow tokenized shares from Apollo Global Management’s $1.3 billion Diversified Credit Fund (CRDIX: Nasdaq) to be used as collateral to buy additional shares of the fund and make leveraged bets on its performance.

“You get a TradFi asset that can't be financed in TradFi, you bring that asset into DeFi and you've got atomized liquidity,” said Reid Simon, Head of DeFi/Credit Solutions at Securitize. “By introducing this asset into that structure [DeFi], we are able to deliver somewhere around 16% yield with off the shelf elements of which crypto is already intimately aware.” 

“It's kind of table stakes for crypto native assets,” he says. 

Endless Loops of Leverage

The process works like this. Apollo’s Diversified Credit Fund exists off-chain and sells shares to investors who get pro-rated access to its underlying debt securities. As a way to generate a new source of demand, Apollo and Securitize partnered in January to launch a tokenized feeder fund called the Apollo Diversified Credit Securitize Fund ("ACRED"). So far it has accumulated $71.8 million.

But what good is having a tokenized share without putting it to work? “The construct around this was if you're an investor in our securities, we want to find ways to add incremental utility or enhanced yield, otherwise, what's really the point of tokenizing the asset in the first place?” says Simon.

On April 30, Securitize launched sACRED, a version of the tokenized ACRED shares that can be deposited in a DeFi vault, powered by $3.05 billion lending protocol Morpho, that lets users borrow the dollar-pegged USDC stablecoin against its value. Simon said in the interview that users can borrow $0.78 for every $1 of ACRED deposited.

How does that turn into leverage? Investors can utilize the process illustrated below to deposit ACRED into a Morpho vault, borrow USDC, buy more ACRED, deposit it, and then do it again and again — basically the same trick that DeFi traders (or degens) use, only this time with a much less liquid type of asset.

There is no official limit to the leverage. The primary guardrail is simply the rules of supply and demand. At some point it would become uneconomical to keep borrowing funds, as the price to borrow would go up along with demand. “The biggest thing preventing you from looping this infinite times is that as you take on more debt, the borrow rate goes up as well, typically,” said Rahul Goyal, Head of International Partnerships at Gauntlet in an interview. 

Is It Safe?

With this complex setup and seemingly few guardrails aside from the natural rules of supply and demand and liquidation thresholds set by Gauntlet to keep the system running in the event of a price downturn, it is fair to wonder about the safety of the investment. After all, nine- and ten-figure liquidations are known to happen in crypto, and a quick price downturn unwinds a lot of long-focused leverage in DeFi markets, whose massive positions in tokens such as ether are obtained through the same looping process outlined above. 

However, Goyal pointed out that these vaults have a unique characteristic that could make them immune to massive liquidations that are all too familiar to the crypto industry. “Cascading liquidations are less of a concern on Morpho because of its isolated risk pools. Unlike AAVE or Compound, this isolated pool means that your blowup in one pool doesn't affect the other pools or other assets.”  

According to Goyal, the big difference in these liquidation models – which occur when an onchain liquidator pays off someone’s debt and then receives whatever is left of the collateral (which still should be higher than the value of the loan) – is that for an asset like ether, the liquidator immediately sells the asset for stablecoins, driving down the price of the asset and impacting the collateral of every other ether loan across DeFi. 

The process is different with tokenized real-world assets (RWAs), which can only be sold to pre-authorized users.

Who Wants a Souring Loan?

But then that raises the question of who would step in to liquidate a souring sACRED loan. After all, who would want to pay off a debt and receive a potentially depreciating and illiquid asset? Goyal pointed out that one group of participants that went unannounced in the press releases announcing the launch were crypto prime brokers and market makers, who he said have agreed to step in and liquidate the loans as needed. He did not provide any names, but told Unchained that the company had a hit rate of 100% in these discussions. In a way, it makes sense that these firms are moving into the tokenized fund space, as Unchained has previously reported that they are increasingly taking tokenized treasuries as collateral to fund margin for clients. 

But this market is still risky for these professional firms. After all, they cannot sell the underlying collateral once they take ownership of it. Yes, they would likely pocket a bonus if, as an example, they pay off a $50 debt and take ownership of $75 dollar worth of ACRED tokens. But, they may have to hold onto those tokens for months before they can be sold.

Apollo’s tokenized credit fund is what is known as an interval fund. This means that unlike an ETF where arbitragers can buy and sell assets in order to keep the price of the securities on par with NAV, this fund trades more like a closed-end fund that does not allow easy redemptions. The easiest comparison to make for someone in crypto were the absurd premiums and then discounts that impacted Grayscale’s $19.2 billion bitcoin fund, GBTC, before it converted into an ETF. For interval funds like Apollo’s redemptions are only offered once per quarter, and they are required to redeem no more than 5% at each period (though they can sell more).

This fact is critical for investors buying the ACRED token to know even if they do not want to add leverage. Prior to being asked about the quarterly redemption intervals by Unchained, Securitize’s website advertised daily redemptions for ACRED holders with the disclaimer that they were subject to market conditions. After being asked this question, the company removed the daily liquidity promise from its website. It now reads, “Liquidity is subject to market availability and may not always be guaranteed.”

If You Make It Liquid, Will They Come?

If there is a perfect example to illustrate the challenges with providing liquidity to an illiquid asset, without even exploring the additional challenges of leverage, consider the saga of the SPDR® SSGA IG Public & Private Credit ETF (PRIV). One could be forgiven if they had heard of this ETF under its original name, which debuted with the fund in February 2025: the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV). Yes, the same Apollo.

This was a novel ETF because it tried to reproduce the same liquidity found in normal ETFs while investing up to 80% of funds in private debt. Prior to this fund’s launch, the SEC only allowed ETFs to hold 15% of a fund in illiquid securities, such as private credit. For this to work, Apollo actually had to devise a bespoke plan to guarantee liquidity for investors by offering three separate liquidity windows every trading day. 

“It's almost like a backboard Apollo being willing to step in and buy some of the private credit,” says Bryan Armour, Director of Passive Strategies Research, North America, at Morningstar. “It's a totally unique new liquidity agreement that they came up with. They came up with this on their own between the two [entities], and I think State Street didn't even want to publish what that agreement was because they saw it as a competitive advantage because it was something that hadn't existed.” 

This story is doubly interesting because the SEC, while it was waiting for Paul Atkins to become SEC chair, allowed the fund to begin trading without issue on Feb. 27. The very next day it sent a detailed letter to both issuers asking for more clarity on its operations, leading to the revelation of the bespoke liquidity agreement, which is also what led to Apollo’s name being dropped from the fund.

And what did they get for all of that trouble? The fund launched in February with a seed of $50 million. Today that number is up to $54.43 million, and the fund is down 1.3% since it launched.

ACRED has managed to raise $70 million from investors, but that was when its website advertised daily liquidity. It is fair to wonder how many investors would have bought had they known the limitations on selling.

Related content: 

• U.S. Treasuries Are Ailing Due to Tariffs, but Tokenized Treasuries? Growing

• Why Trump-Induced Stagflation Could Finally Make Bitcoin a Safe Haven

• Tokenized Treasuries Grow 20X Faster Than Stablecoins as Crypto Market Languishes