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CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt

A private credit fund has a loan book of USD 200 million yielding 9.0% gross. It expects annual credit losses of 1.5% of the book and charges management fees and expenses of 1.0% of the book. Ignoring leverage and taxes, the expected net return to investors is closest to:

The expected net return is about 6.5%. Start with the 9.0% gross yield, subtract the 1.5% expected credit losses and the 1.0% of fees and expenses. Ignoring either deduction gives 7.5% or 8.0%, which overstates the investor's return.

  1. A6.5%Correct
  2. B7.5%
  3. C8.0%

Explanation

Net return = 9.0% gross yield - 1.5% credit losses - 1.0% fees = 6.5%. Subtracting only fees gives 8.0%, and subtracting only credit losses gives 7.5%; both omit a deduction.

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