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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A pension fund's investment committee is reviewing why institutional allocations to private credit have grown strongly after a long period of very low policy rates. Which explanation best reflects the supply-side 'search for yield' driver?

The search-for-yield driver means institutions with return targets or fixed liabilities moved into higher-yielding, less liquid private loans when public bond yields were compressed, accepting an illiquidity and credit premium to close the gap between asset returns and their obligations.

  1. AInvestors facing liabilities with fixed return targets shifted toward higher-yielding, less liquid loans when yields on public bonds were compressedCorrect
  2. BBanks raised their lending limits to mid-sized firms because Basel III lowered all risk weights
  3. CBorrowers preferred floating-rate private loans because they wanted to avoid any covenants
  4. DRegulators required insurers to hold a minimum share of assets in direct loans

Explanation

Low yields on public fixed income left institutions with a gap versus return targets or liability costs. They accepted illiquidity and credit risk in private credit to earn a premium. The other options describe bank behaviour, borrower preference or a requirement that does not exist.

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