FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A direct lending fund uses a closed-end structure with a 7-year life and calls capital from investors as loans are originated. Compared with a bank funding similar loans using demand deposits, which risk is most reduced for the fund?
The fund's funding run risk is most reduced. Closed-end capital is locked in for the fund's life, so investors cannot withdraw on demand as depositors can, though borrower credit risk and loan illiquidity remain with the fund.
- ACredit risk of the borrowers
- BFunding run risk from short-term liabilitiesCorrect
- CIlliquidity of the underlying loans
- DInterest rate risk on floating-rate loans
Explanation
Locked-up capital means investors cannot withdraw on demand, so the fund faces much less run risk than a deposit-funded bank. Borrower credit risk and loan illiquidity remain, and the structure does not remove them.
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