ACRED: Apollo's Tokenized Credit Fund Bridges Wall Street and DeFi

Apollo Global Management's ACRED fund tokenizes private credit on the blockchain, attracting investors with DeFi composability and potential for leveraged returns. But new risks arise.

Apollo Global Management is shaking things up with its new Securitize Tokenized Apollo Diversified Credit Fund, or ACRED. This innovative fund is bridging the gap between traditional finance and the decentralized world of blockchain, and people are noticing.

ACRED: A New Era for Private Credit

ACRED, launched in partnership with Securitize Inc., is a tokenized feeder fund mirroring Apollo’s existing Diversified Credit Fund. Instead of old-school paper statements, investors get digital tokens stored in crypto wallets. Since its January launch, ACRED has already pulled in over $100 million.

How It Works: DeFi Composability

Here's where it gets interesting. ACRED holders can "mint" a second token called sACRED, using it as collateral to borrow stablecoins on DeFi platforms. This borrowed cash can then be reinvested into ACRED, magnifying exposure to Apollo’s loan portfolio. It's composability within DeFi which allows you to do many strategies with the fund that you can’t do in traditional finance.

Early participants include Coinbase Asset Management, and the fund requires a minimum commitment of $50,000 with a 2% management charge.

Wall Street Embraces Blockchain

Apollo's move follows similar experiments by big players like BlackRock and Franklin Templeton, signaling a broader shift on Wall Street. They're moving from crypto skeptics to embracing blockchain tech to tap into new capital pools.

Securitize emphasizes that ACRED's value is tied to the underlying loans, allowing investors to earn loan interest. Using sACRED as collateral on DeFi platforms offers extra gains, but also adds risk.

The Allure of DeFi

Composability is a key draw for DeFi. Tarun Chitra, CEO of Gauntlet, notes that this flexibility can attract buyers even when interest rates aren't ideal for private credit.

DeFi Risks: Handle with Care

Tying a fund to blockchain infrastructure isn't without its hazards. While ACRED tokens are priced at the fund’s daily NAV to dampen price swings, DeFi risks persist. Rising stablecoin borrowing costs, software bugs, or liquidity gaps can still lead to losses. Gauntlet provides real-time monitoring to track these dangers.

A potential drop in the fund’s NAV could also trigger automatic liquidation of large loans backed by sACRED. Redemptions are limited to once per quarter, with Apollo committing to repurchase at least 5% of shares.

However, because ACRED lives on a blockchain, holders can bypass the normal redemption process by selling their tokens to other buyers—a perk not available with traditional private funds.

The Future of Finance: A Blend of Old and New

Reid Simon, head of DeFi and credit solutions at Securitize, notes the evolution of the space, with crossover macro funds, family offices, and early TradFi players entering the on-chain world.

Looking ahead, Paul Frambot, co-founder of Morpho, predicts more funds will migrate to blockchain rails. He believes investors will “realize that DeFi’s a miracle infrastructure and they will eventually run their fund on‑chain.”

Wrapping Up

ACRED represents an exciting step towards integrating traditional finance with the innovative world of DeFi. It's got potential for high returns, but remember, it's not all sunshine and rainbows. There are risks involved, so do your homework before diving in. Who knows, maybe one day we'll all be managing our portfolios with crypto wallets while sipping lattes in the metaverse.