FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
Which feature of private credit most complicates the regulatory goal of limiting liquidity mismatch in vehicles offering investors periodic redemptions?
The key issue is holding illiquid, hard-to-sell loans while offering investors periodic redemptions. This liquidity mismatch can force fire sales or redemption gates under stress, which is why regulators focus on it for semi-liquid private credit vehicles.
- AHolding assets that are illiquid and hard to sell quickly while promising investors relatively frequent liquidityCorrect
- BHaving floating-rate loans that reset with benchmark rates
- CLending to borrowers with covenants
- DUsing fixed management fees
Explanation
Liquidity mismatch arises when illiquid loans back redemption promises, risking forced sales or gating in stress. Floating rates, covenants and fees do not create this mismatch.
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