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

An analyst notes that private equity dry powder is large and that sponsors face pressure to deploy capital within investment periods. How does this most plausibly affect demand for private credit?

Substantial dry powder and deployment pressure raise the number of leveraged buyouts, which increases demand for private credit financing. Lenders compete for these deals, so terms often shift in the borrower's favor, not toward lower leverage or all-equity transactions.

  1. AIt increases demand for leveraged buyout financing, supporting private credit volumes and pushing terms toward borrowersCorrect
  2. BIt reduces demand because sponsors switch to all-equity deals
  3. CIt has no effect, since sponsors only use bank financing
  4. DIt lowers borrower leverage because lenders gain pricing power

Explanation

Large unspent sponsor capital leads to more buyouts, which are typically levered, raising credit demand. Competition among lenders for these deals tends to loosen terms rather than tighten them.

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