Apollo's $1.3B Credit Fund Opens to DeFi Leverage via Securitize and Gauntlet Partnership

Securitize has partnered with Gauntlet to integrate Apollo Global Management’s $1.3 billion Diversified Credit Fund into the decentralized finance (DeFi) space. This unique collaboration allows investors to utilize fund tokenized shares as collateral. They are then able to buy more shares, which in practice allows them to take out leveraged bets on the fund’s returns. This strategic shift is intended to further integrate traditional finance (TradFi) with DeFi, unlocking new potential for yield enhancement and liquidity provision.

Securitize recently announced the launch of sACRED, a tokenized version of ACRED shares. You can now deposit these tokens into a DeFi vault powered by Morpho, a lending protocol that currently has $3.05 billion in assets. Morpho lets users borrow the dollar-pegged USDC stablecoin. This Tracer opportunity not only capitalizes on the value of sACRED but creates previously unavailable investment strategies in the DeFi ecosystem. The effort’s stated purpose is to take advantage of the rapidly growing private credit market, projected to reach $3 trillion by 2028. It will open huge, vibrant, new channels for realizing yields.

DeFi Integration and Yield Enhancement

Securitize and Gauntlet’s collaboration introduces Apollo Global Management’s Diversified Credit Fund (CRDIX: Nasdaq) to the DeFi realm. Through this partnership, investors can use their tokenized ACRED shares to borrow USDC against them. Further, this strategy doubles or triples their risk with respect to the fund’s performance. The whole idea behind this integration is to provide more yield than what’s available in traditional finance.

"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," - Reid Simon, Head of DeFi/Credit Solutions at Securitize.

The sACRED token, deposited into a Morpho-powered DeFi vault, allows for this. Through this construct, Securitize and Gauntlet sought to bring additional utility or improved yield to tokenized assets.

"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?" - Reid Simon, Head of DeFi/Credit Solutions at Securitize.

Risk Management and Liquidation Models

In a comprehensive analysis published by GAUNTLET’s Rahul Goyal, Head of Institutional Partnerships, these liquidation models and the dangers that come with them in DeFi lending were explored. He raised concerns about the extreme asset devaluation that could occur during any liquidations, especially on valued assets such as ether.

"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," - Rahul Goyal, Head of Institutional Partnerships at Gauntlet.

To prevent these risks from occurring, Morpho uses isolated risk pools, minimizing the chances of a domino effect liquidation. This design helps prevent problems in one pool from spreading to other pools or assets on the platform.

"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," - Rahul Goyal, Head of Institutional Partnerships at Gauntlet.

ACRED Performance and Market Dynamics

ACRED has already raised $71.8 million, a sign of increasing appetite for tokenized assets. Securitize had originally marketed daily redemptions for ACRED holders, depending on market conditions. Yet this promise was quickly taken down from its website after questions arose, pointing to larger changes in the fund’s upcoming operational structure.

According to Reid Simon, one of ACRED’s creators, users will be able to borrow $0.78 for every $1 of ACRED they deposit. The SPDR SSGA IG Public Private Credit ETF’s total assets are $54.43 million. Since launch, it has fallen 1.3%, highlighting the divergence between classic traditional ETFs and new innovative DeFi-integrated ETFs.

"You get a TradFi asset that can’t be financed in TradFi, you bring that asset into DeFi and you’ve got atomized liquidity," - Reid Simon, Head of DeFi/Credit Solutions at Securitize.

The latter because the flexibility to use assets in new ways within DeFi is growing ever more important, Simon continued.

"It’s kind of table stakes for crypto native assets," - Reid Simon, Head of DeFi/Credit Solutions at Securitize.