FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A risk manager studies how conditions in the leveraged buyout market affect private credit demand. Which scenario would most plausibly raise demand for private credit from sponsors in the short run?
Demand for private credit rises when public leveraged loan and high-yield markets are volatile or shut while sponsors hold plenty of undeployed capital. Direct lenders can still commit funds with certainty, so sponsors shift financing to them, whereas open public markets or cheaper bank loans would reduce that demand.
- APublic leveraged loan and high-yield markets become volatile and close to new issuance, while sponsors still hold large undeployed committed capitalCorrect
- BSponsors have no capital to deploy and no acquisition targets
- CPublic bond spreads fall sharply and markets are wide open
- DRegulators relax bank capital rules, making bank syndicated loans cheaper for all borrowers
Explanation
When public markets are disrupted, sponsors with dry powder turn to direct lenders that can still commit capital, raising private credit demand. Wide-open public markets and cheaper bank lending would divert borrowers away from private credit, and sponsors with no capital or targets generate no deal demand.
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