medium · Private Credit loan-structures-instruments
An investor is analyzing two private debt funds. Fund A holds only senior secured loans with maintenance covenants. Fund B holds 'Covenant-Lite' senior loans.
During a moderate recession, how would the 'Smoothing Effect' in Level 3 valuations likely affect the reported NAV of these funds?
- Reported NAV will lead public market price changes each quarter.
- Reported volatility will be lower than actual market volatility for both.
- Fund B will show higher volatility since it lacks maintenance covenants entirely.
- Fund A will show lower volatility due to its tighter maintenance covenant structure.
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