easy · Private Credit 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 federal government grants special targeted tax breaks and credits to any institutional 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 historically post meaningfully and consistently higher observed default rates than similarly rated, actively traded public corporate bonds do.
- Private loans are almost always structured as unsecured obligations, and this lack of collateral protection inherently drives up required returns.
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