FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
An insurer is considering moving from a private credit fund to a semi-liquid evergreen vehicle that offers quarterly redemptions capped at 5% of NAV. In a stress event, what is the main risk to remaining investors?
The main risk is a liquidity mismatch: redemptions are met from the most liquid assets first, leaving remaining investors with a more illiquid portfolio and creating a first-mover advantage for those who redeem early.
- ARedemption requests may force sales of the most liquid assets, leaving a less liquid residual portfolioCorrect
- BRedemptions are unlimited and paid at par
- CThe fund must liquidate all loans immediately
- DManagement fees are waived
Explanation
Meeting redemptions from liquid holdings first leaves a more illiquid pool for remaining investors, and gates delay but do not remove the first-mover incentive. Redemptions are capped, not unlimited.
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