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

A pension fund's investment committee notes that after a prolonged period of low government bond yields, it has raised its allocation to private credit funds. Which interpretation best matches the supply-side driver of private credit growth described in the global drivers literature?

The key supply-side driver is search for yield: when safe bond yields are low, institutional investors such as pension funds accept illiquidity and complexity to earn higher returns, so they allocate more capital to private credit funds, expanding the supply of private lending.

  1. AInstitutional investors reach for higher yield and accept illiquidity to meet return targets, increasing the supply of funds to private creditCorrect
  2. BBanks are required by regulation to transfer all corporate loans to pension funds, increasing the supply of private credit
  3. CBorrowers prefer private credit because public bond markets have been closed to all issuers
  4. DPension funds increase private credit to reduce duration mismatch by shortening asset maturity

Explanation

Low yields on traditional fixed income push institutions to seek higher returns, and private credit offers an illiquidity and complexity premium. This raises capital supply to the asset class. The other options describe mechanisms that are not the search-for-yield driver.

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