Supply chain issues aren’t limited to bikes and baby formula. As the Fed withdraws liquidity from the banking system and investor cash exits public credit, it’s more challenging to deliver capital to traditional buyouts and M&A.

In pivoting from a world of abundance to one of scarcity, credit markets are struggling to adjust. Direct lenders have built up record levels of dry powder over the past five years, but they have also been busy putting it to work. For several reasons, experienced managers are becoming more judicious about deploying the capacity they have left.

First, credit fund investors are more cautious about new allocations, thanks to public market volatility and concerns around a slowing economy. Ironically the better the yield prospects for floating rate assets in a rising SOFR environment, the more tempting to wait for even better returns down the road.

The dislocation in broadly syndicated loans has also compelled issuers to pivot to private markets for credit solutions. An estimated $1 trillion of capital is invested in private credit today, but the amount of dry powder is less.