CAIA - CIT 8 - Private Credit

Question 1

Private credit strategies generally fall into 2 broad categories:

1. C
2. R

Answer 1

Private credit strategies generally fall into 2 broad categories:

1. Capital preservation

2. Return maximizing

Question 2

Capital preservation strategies include traditional ___-___ ___ and ___ ___ funds. Returns are typically ___ skewed.

Answer 2

Capital preservation strategies include traditional sponsor-focused mezzanine and senior debt funds. Returns are typically negatively skewed.

Question 3

Return-maximizing strategies aim to deliver larger gains, and include ___ ___and ___ ___ ___funds.

Answer 3

Return-maximizing strategies aim to deliver larger gains, and include capital appreciation and distressed corporate credit funds.

Question 4

Strategies that fall outside capital appreciation and return maximizing strategies are ___ and ___.

Answer 4

Strategies that fall outside capital appreciation and return maximizing strategies are opportunistic and niche.

Question 5

___ ___funds are typically all-weather strategies in corporate credit due to their ability to protect on the downside. They tend to experience more headwinds in ___-___ ___.

Answer 5

Senior debt funds are typically all-weather strategies in corporate credit due to their ability to protect on the downside. They tend to experience more headwinds in late-stage expansions.

Question 6

Senior lenders benefit from US bankruptcy code that supports their ___ ___and typically from a ___ ___ structure that insulates them from ___ ___ ___.

Answer 6

Senior lenders benefit from US bankruptcy code that supports their recovery efforts and typically from a floating rate structure that insulates them from rising interest rates.

Question 7

Credit opportunity funds’s best opportunity set is in ___ and ___ ___ phases.

Answer 7

Credit opportunity funds’s best opportunity set is in contractions and early expansion phases.

Question 8

Music and health care royalty strategies (are/are not) impacted significantly by credit cycles.

Answer 8

Music and health care royalty strategies are not impacted significantly by credit cycles.

Question 9

Private credit strategies are exposed to 3 key operating risks:

1. S
2. L
3. J

Answer 9

Private credit strategies are exposed to 3 key operating risks:

1. Scale

2. Leverage

3. Jurisdiction

Question 10

___ funds work with PE sponsors and senior lenders to provide junior capital to finance buyouts and acquisitions.

Answer 10

Mezzanine funds work with PE sponsors and senior lenders to provide junior capital to finance buyouts and acquisitions.

Question 11

Mezzanine funds typically have ___-___year lock up periods, with limited liquidity from ___-___ ___.

Answer 11

Mezzanine funds typically have 8-10 year lock up periods, with limited liquidity from current-pay interest.

Question 12

The primary risk in mezzanine lending is:

Answer 12

Credit losses exceed gains from equity

Question 13

At the fund level, direct lending strategies can be (levered/unlevered/both).

Answer 13

At the fund level, direct lending strategies can be both

Question 14

Direct lenders risks include:

1. C
2. R
3. R
4. G

Answer 14

Direct lenders risks include:

1. Credit risk

2. Relying on a few sponsors

3. Relying on M&A

4. General competition

Question 15

___ ___strategies originate par debt or equity like instruments that often serve as substitutes for private equity.

Answer 15

Capital appreciation strategies originate par debt or equity like instruments that often serve as substitutes for private equity.

Question 16

Capital appreciation instruments are typically ___ ___or ___ ___.

Answer 16

Capital appreciation instruments are typically preferred equity or subordinated debt.

Question 17

___ ___managers typically purchase deeply discounted debt securities.

Answer 17

Distressed credit managers typically purchase deeply discounted debt securities.

Question 18

Most distressed managers are ___ with expertise in ___ ___.

Answer 18

Most distressed managers are negotiators with expertise in legal documentation.

Question 19

A small number of distressed credit managers are ___-___-___investors, who base returns on their view of a company’s fundamental value.

Answer 19

A small number of distressed credit managers are pull-to-par investors, who base returns on their view of a company’s fundamental value.

Question 20

The primary risk to distressed credit strategies is:

Answer 20

The numerous other parties involved in restructuring

Question 21

___ ___strategies apply debt capital opportunistically when market liquidity is low or value is high.

Answer 21

Credit opportunities strategies apply debt capital opportunistically when market liquidity is low or value is high.

Question 22

Traditionally, most specialty finance strategies have purchased ___ ___.

Answer 22

Traditionally, most specialty finance strategies have purchased nonperforming loans.

Question 23

___ ___holds some of the most liquid private credit strategies.

Answer 23

Specialty finance holds some of the most liquid private credit strategies.

Question 24

The private credit process is similar across most strategies:

1. S
2. D
3. M
4. R

Answer 24

The private credit process is similar across most strategies:

1. Source

2. Due diligence

3. Manage

4. Refinance/Self Liquidate

Question 25

Mezzanine and senior debt managers expect to take a ___ approach to portfolio management.

Answer 25

Mezzanine and senior debt managers expect to take a passive approach to portfolio management.

Question 26

Distressed credit managers take an ___ approach to creating value.

Answer 26

Distressed credit managers take an active approach to creating value.