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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

An analyst argues that private credit poses less run risk than bank lending to the same borrowers. Which feature of typical private credit fund structures best supports this argument?

Long-term, closed-end funding with lockups and limited redemption rights lowers liquidity mismatch and reduces the risk of investor runs. This makes private credit funds less prone to sudden forced selling than institutions funded by short-term liabilities, although leverage and opacity remain concerns.

  1. AFunds rely mainly on overnight wholesale funding that can be rolled easily
  2. BInvestors' capital is often locked up in closed-end structures with limited redemption rightsCorrect
  3. CFunds hold large liquid government bond buffers that match all commitments
  4. DFund loans are guaranteed by deposit insurance schemes

Explanation

Closed-end structures with lockups and limited redemptions reduce the liquidity mismatch and the chance of forced selling from investor runs. Overnight funding would increase run risk, and deposit insurance does not cover these loans. Leverage and bank linkages can still create vulnerabilities.

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