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

A private credit fund relies on a capital call subscription line secured by investors' uncalled commitments. Which risk is most directly increased by heavy use of such lines?

Heavy use of subscription lines can inflate reported IRR by delaying capital calls and creates liquidity risk tied to investors' ability and willingness to fund calls, so investor credit quality and concentration must be monitored.

  1. AUnderstated interest-rate risk because loans are floating-rate
  2. BDistorted reported IRR and a hidden liquidity and investor-concentration risk if investors fail to meet callsCorrect
  3. CReduced default risk of underlying borrowers
  4. DElimination of the fund's need to monitor investor credit quality

Explanation

Subscription lines delay capital calls, which raises IRR relative to the multiple of invested capital. They also depend on investors honoring calls, so investor credit quality and concentration matter, particularly in stress. They do not lower borrower default risk.

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