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

A pension fund is comparing an open-ended (evergreen) vehicle with a closed-end drawdown fund for its private credit allocation to direct loans to middle-market companies. Which statement best describes the main liquidity-related risk of the open-ended structure?

The main risk is a liquidity mismatch: open-ended private credit vehicles promise periodic redemptions while holding illiquid, infrequently valued loans. In stress, investors may rush to redeem, forcing gating or asset sales. Fixed terms and capital calls are features of closed-end funds, not evergreen structures.

  1. AInvestors cannot redeem before the end of a fixed term, so the manager must hold large cash buffers
  2. BCapital is called only as loans are originated, so uncalled commitments create a funding gap for the investor
  3. CRedemption rights are offered against illiquid, infrequently valued loans, creating a liquidity mismatch and potential run or gating dynamicsCorrect
  4. DManagement fees are charged only on invested capital, which discourages the manager from deploying funds

Explanation

Open-ended vehicles give investors periodic redemption rights while the underlying loans are illiquid and valued by models. This mismatch can cause gating or a first-mover advantage in redemptions. Options A and B describe features of closed-end drawdown funds, not open-ended ones.

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