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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

A fund holds a USD 200 million private loan portfolio valued at par by the manager. A risk analyst estimates comparable public leveraged loans trade at 96 cents on the dollar, and applies an illiquidity premium of 150 bp per year over an expected remaining life of 3 years (approximately, using simple multiplication and ignoring discounting) to price the private loans. Public comparable discount of 4 points already reflects credit and market spreads, but not illiquidity. What is the analyst's estimated fair value of the portfolio, assuming the illiquidity discount is additive to the public price discount?

Fair value is USD 183.0 million. The illiquidity discount is 1.5% times 3 years, or 4.5 points, added to the 4-point public discount for a total 8.5-point markdown. Applying 91.5% to the USD 200 million par value gives USD 183.0 million.

  1. AUSD 182.0 millionCorrect
  2. BUSD 188.0 million
  3. CUSD 192.0 million
  4. DUSD 183.0 million

Explanation

Illiquidity discount = 1.5% x 3 = 4.5 points. Total discount = 4 + 4.5 = 8.5 points, so value = 91.5% x 200 = 183.0 million. Check: 200 x 0.915 = 183.0. The 182.0 option is wrong, so the correct choice is 183.0.

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