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

A pension plan is comparing two ways to gain exposure to direct-lending loans: a closed-end private credit fund with capital commitments and a business development company (BDC) that is publicly listed. Which statement best describes a key liquidity-related difference between the two vehicles?

A listed BDC offers daily trading liquidity, though its price may fall below net asset value in stress, whereas investors in a closed-end private credit fund are generally locked in for the fund's life and receive cash only as loans are repaid.

  1. AClosed-end fund investors can redeem units daily at net asset value, while BDC shares cannot be traded
  2. BA listed BDC offers investors daily trading liquidity, but its share price can trade at a discount to net asset value, while closed-end fund investors are generally locked up for the fund's lifeCorrect
  3. CBoth vehicles provide identical liquidity because their underlying loans are the same
  4. DClosed-end fund investors can exit at any time by selling to the borrower, while BDC investors cannot exit

Explanation

Listed BDCs give investors an exchange-traded exit, but prices can diverge from NAV, especially in stress. Closed-end private funds lock capital for years and only distribute as loans are repaid. Option A reverses the two structures.

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