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

An investor in an evergreen private credit vehicle offering quarterly redemptions notes that the underlying loans take years to mature and cannot be sold quickly without a discount. Which risk is most clearly created by this structure?

The key risk is liquidity mismatch. The vehicle promises periodic redemptions while holding illiquid, long-dated loans that cannot be sold quickly at fair value. Heavy redemptions could force discounted asset sales or gating, disadvantaging investors who remain in the fund.

  1. ALiquidity mismatch, since investors can redeem faster than assets can be sold at fair valueCorrect
  2. BCurrency mismatch, since loans are denominated in several currencies
  3. CPrepayment risk, since the loans amortize
  4. DModel risk, since the vehicle uses a Gaussian copula

Explanation

Liquid liabilities funding illiquid assets create a maturity or liquidity mismatch. If redemption requests surge, the manager must sell at a discount or gate redemptions, harming remaining investors. The other options are not inherent to the structure described.

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