Explanation:
Rapid growth in assets under management (AUM) in a private credit fund creates pressure to deploy capital quickly (often referred to as "dry powder" pressure). In order to invest large amounts of capital, fund managers might be forced to accept lower-quality loans, weaker covenants, or deteriorating underwriting standards, especially in a competitive environment where too much capital is chasing too few good deals.
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Q.47 A private credit fund, Vanguard Credit, primarily invests in loans to technology startups and is experiencing rapid growth in assets under management. Which potential risk is most likely to increase for Vanguard Credit in this scenario?
A
Stale valuations due to a lack of market prices.
B
Deteriorating underwriting standards due to increased competition.
C
Increased exposure to interest rate risk due to floating rate loans.
D
Liquidity risk due to the use of closed-end fund structures.