FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A private credit fund has $800 million of committed capital, of which 75% has been drawn and invested in loans yielding a 10% annual all-in return. Undrawn capital earns nothing. Management fees are 1.5% on committed capital and there are no other costs or leverage. What is the fund's net annual return on committed capital?
The fund earns 10% on 75% of committed capital, which is 7.5% of commitments. Deducting the 1.5% fee charged on the full commitment leaves a net return of 6.0% on committed capital, showing how undrawn capital creates cash drag.
- A7.5%
- B6.0%Correct
- C9.0%
- D8.5%
Explanation
Gross income is 0.75 x 10% = 7.5% of committed capital. Subtracting the 1.5% fee on committed capital gives 6.0%. Option 7.5% ignores the fee. Option 9.0% subtracts the fee from 10%. Option 8.5% subtracts the fee from the 10% yield and ignores undrawn capital.
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