FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
Which statement best describes a key risk that fund-level leverage introduces for private credit funds?
Fund-level leverage amplifies losses on equity when asset values fall, and borrowing against investor commitments can delay capital calls and flatter reported performance. It does not make loans liquid or reduce default correlation.
- AIt eliminates the need for covenant monitoring
- BBorrowing backed by investor commitments can mask underlying fund performance and amplify losses when asset values fallCorrect
- CIt reduces the correlation between loan defaults
- DIt converts illiquid loans into liquid assets
Explanation
Leverage amplifies losses on equity, and subscription lines delay capital calls, which can inflate IRR and hide performance. It does not change the liquidity of the loans or reduce default correlation.
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