Explanation:
When a specialized fund experiences rapid growth in assets under management (AUM), there is immense pressure to deploy the new capital. In niche markets such as private loans to technology startups, the supply of high-quality investment opportunities may be limited. To meet deployment targets, funds often have to compete more aggressively for deals, which frequently leads to relaxed covenants, riskier investments, and overall deteriorating underwriting standards.
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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.
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