Private credit’s historic rise is creating a problem that most asset managers would love to have: too much cash in their coffers.

Dry powder, or the amount of money committed to private credit funds that has yet to be deployed, is at a record. That’s in part because demand for their capital from buyout firms remains tepid. What’s more, bank leveraged finance desks are increasingly seeking to poach back business. The result has been what some have called a ‘race to the bottom’ among private credit managers.

“Because of this supply-demand imbalance you’re starting to see this behavior shift in parts of the private credit market — turning into a bit of an auction for the tightest terms,” said Sachin Khajuria, who runs family office firm Achilles Management and invests across private assets. “That means weaker underwriting standards due to competition.”

To win deals, managers in the $1.7 trillion industry are offering cheaper pricing and giving up key investor protections. They’re also keeping larger slices of financings for themselves, and even swooping in at the last minute to snatch business from the leveraged loan market.

“Right now I’d be really selective in private credit,” said Khajuria, a former partner at Apollo Global Management Inc.

In recent weeks direct lenders have offered some of the most aggressive financing terms ever seen in the market.

Last month a group of private credit providers offered EQT AB a loan for its buyout of supply chain risk-management software provider Avetta at 4.5 percentage points over SOFR, one of the cheapest rates on record.

And earlier this month direct lenders provided a loan to KKR’s Depot Connect International with a 99.75 cent issue discount, one of the smallest ever in private credit.

“All it takes is one or two institutions to like a deal to create that competitive pricing, and there’s real desperation to put money to work given all the dry powder raised by third-party capital,” said Bill Eckmann, head of principal finance in the Americas at Macquarie Capital.

Funds are also becoming less willing to share deals with their competitors, often cutting multibillion-dollar checks to individual companies.

That’s a 180 degree shift from the “clubbing” days, when a dozen or more direct lenders would join hands, taking small pieces of a financing. Last week Blackstone Inc. provided a $4.5 billion commitment to CoreWeave Inc., it’s largest-ever single commitment, leaving a handful of rivals to split $3 billion between themselves.

But slashing prices or taking bigger bites of loans sometimes isn’t enough. Direct lenders are also fighting tooth and nail to win transactions from the broadly syndicated market. Earlier this month a group of direct lenders provided $385 million of debt to Ribbon Communications Inc. after the firm had already launched a leveraged loan sale, Bloomberg reported.

“The demand for deals is very strong, but the need for credit is not there,” David Mechlin, a portfolio manager in the credit investments group at UBS Asset Management, said during a roundtable earlier this week. “There’s a deficit of credit supply right now.”

There’s now growing attention on how managers are navigating this tricky market. Some, such as HPS Investment Partners, are pumping the breaks. The firm has taken the rare step of limiting inflows into one of its funds, betting that it will give it the flexibility to walk away from deals and ultimately boost returns.

“For managers that have to deploy capital, we want to see how they approach this market and are watchful for who grows the most in this environment,” Ana Arsov, global head of private credit at Moody’s Ratings, said in an interview.

This article was provided by Bloomberg News.