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

An evergreen private credit fund offers quarterly redemptions to investors but holds illiquid loans. After a market shock, redemption requests reach 15% of NAV, while liquid assets are 5% of NAV. Which risk management response is most consistent with addressing this liquidity mismatch?

The best response is to use predefined liquidity tools such as gates or redemption queues applied equally to all investors. Redemptions of 15% against only 5% liquid assets expose a mismatch; selling the best assets or adding leverage would harm remaining investors.

  1. AMeet all requests immediately by selling the most liquid loans, leaving remaining investors with a less liquid portfolio
  2. BUse pre-defined liquidity management tools such as gates or redemption queues, applied consistently to all investorsCorrect
  3. CRevalue loans upward to reduce the percentage of NAV requested
  4. DRaise leverage to fund redemptions without selling assets

Explanation

Predefined tools like gates and pro-rata redemption limits manage the mismatch and treat investors fairly. Selling the most liquid assets first worsens portfolio quality for remaining investors. Upward revaluation is manipulation, and more leverage increases risk during stress.

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