medium · Private Credit & Debt fund-structures-returns-economics
The 'Illiquidity Premium' in private credit is often cited as a key driver of excess returns.
Which of the following best explains why this premium exists?
- The government provides tax breaks to lenders who provide long-term private capital.
- Investors demand higher yields to compensate for the fact that they cannot easily sell the asset and are 'locked in' for the duration of the loan.
- Private loans have significantly higher default rates than publicly traded bonds.
- Private loans are always unsecured, leading to higher required returns.
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