Amid rising geopolitical tensions, tariff wars, and a potential shift in interest rate regimes, equity markets have become noisy and unpredictable. But beneath the surface, a quieter and more profound shift is taking place in the financial world: the rise of private debt. According to Victoria Ivashina, Professor of Finance at Harvard Business School, private debt is not only filling the gaps left by traditional lenders but is also emerging as a key pillar of corporate financing.

In an insightful conversation with N Mahalakshmi, Ivashina discusses how macroeconomic changes, financial innovations, and investor behavior are collectively reshaping global capital markets.

Tariffs, Uncertainty, and the Capex Dilemma

Ivashina addresses the impact of Trump-era tariffs, emphasizing that capital expenditure (Capex) is inherently a long-term bet, requiring clarity on the future. However, uncertainty is currently too high to justify such investments.

“If tariffs are meant to bring back local manufacturing, factories need to be built, which takes time and certainty. We don’t have that right now,” she explains.

There’s a disconnect between what tariffs aim to achieve (incentivizing local production) and what they practically do in an environment riddled with economic unpredictability.

Shifting Capital Flows and the Dollar’s Future

Historically, the U.S. attracted over 60% of global capital flows, primarily due to its stable economy and the dollar’s reserve currency status. But recent shifts indicate that capital is slowly moving away from the U.S., even in uncertain times—something that’s very rare.

“The U.S. dollar’s privileged role is at stake,” Ivashina notes, “though disruption is difficult and won’t happen overnight.”

Still, even the perception of weakening safety or transactional dominance could influence global flows, especially as other regions grow in financial significance.

Interest Rates: A Complex, Conditional Outlook

With prominent voices like Jamie Dimon and Howard Marks suggesting a "higher-for-longer" era of interest rates, Ivashina offers a more nuanced view.

“Near-zero interest rates were an anomaly. But history supports both high and low interest rate regimes, depending on macroeconomic triggers like a recession.”

In other words, there is no one-size-fits-all outlook. Any change in macro conditions—growth, inflation, or recession—can alter the interest rate trajectory.

Corporate Profitability and Innovation Still Strong

Despite volatility, U.S. corporate profitability is at historic highs, driven by innovation, efficiency, and technology. Ivashina notes that there's no indication these fundamentals are weakening.

“The market is pricing in uncertainty, not an earnings collapse.”

Additionally, the financial system is evolving, with private debt stepping in to fund fast-growing firms that may not yet be profitable—particularly in tech and software sectors.

Private Debt: Beyond Just Replacing Banks

Contrary to popular belief, private debt is not merely replacing bank loans. It’s pushing boundaries by offering credit in underexplored and high-growth segments.

“Take fast-growing SaaS companies,” Ivashina says. “They often don’t show positive EBITDA but have strong recurring revenues. Private debt structures are now tailored to them.”

This shift reflects a more sophisticated understanding of credit risk, where investors assess business models, customer retention, and growth scalability—similar to how equity investors think.

Flexible Debt Structures: The True Innovation

Banks typically offer standardized, collateral-backed products. In contrast, private debt is highly customizable. Key innovations include:

• Revenue-based lending

• Transitioning covenants (from revenue to EBITDA as the company matures)

• Deeper analysis of unit economics instead of blanket profitability

This flexibility lowers default risk and supports scaling businesses, even when traditional credit metrics fall short.

Is It Like Junk Bonds? No, It’s Different

While some might compare private debt to high-yield or junk bonds, the reality is more nuanced. In times of stress:

• Junk bonds and syndicated loans alternate in prominence

• Private debt adds a third, more resilient layer

“Private debt shines in downturns because counterparties understand each other and restructuring is simpler,” says Ivashina.

In syndicated or bond markets, distressed investing complicates resolution. In contrast, private credit agreements are direct and flexible, allowing smoother re-negotiations during crises.

Size and Growth of the U.S. Private Debt Market

The U.S. private debt market now stands at $1.5 trillion, fueled by post-2008 financial innovations and investor appetite for yield. Firms like Blackstone significantly expanded their credit arms during this period.

Structures like BDCs (Business Development Companies) have been instrumental in channeling private capital to mid-sized and growth-stage firms that otherwise lack access to public markets.

India’s Challenges and Opportunities

In contrast, India’s private debt landscape remains nascent, constrained by:

• Inefficient restructuring systems

• Frequent economic shocks and currency devaluation

• Investor wariness of long-term local exposure

Yet, there is optimism. With reforms in insolvency and bankruptcy processes, and increased private equity and venture capital presence, India could see a new wave of structured private debt in the coming years.

Global Allocation Trends: Pension Funds, Endowments, Sovereigns

After the 2008 global financial crisis, low yields forced long-term allocators to embrace alternatives, including:

• Private equity

• Growth equity

• Private debt

Now, alternatives form a structural part of portfolios. The presence of dedicated teams and infrastructure means that exposure is not being reduced, only rebalanced across equity and debt.

“Private debt isn’t going away. It’s now a permanent allocation,” says Ivashina.

Venture Funding and Rising Rates

While low rates helped fuel start-up investments, rising rates haven't completely dampened the environment. What’s happening instead is:

• More scrutiny on valuations

• Greater emphasis on profitability over growth-at-any-cost

• Shift in venture capital strategies to include debt instruments

Private debt and venture debt are becoming viable complements to equity funding, offering growth-stage firms more financing options with less dilution.

Conclusion: Private Debt Is No Longer Niche—It’s Strategic

As equity markets remain volatile and traditional lending faces structural limitations, private debt is evolving into a strategic financing tool for companies and a core allocation for institutional investors.

With custom structures, greater flexibility, and an investor mindset aligned with long-term value creation, private debt is transforming how global capital markets function—especially in uncertain times.

For India, learning from these global developments and investing in regulatory and market infrastructure could unlock a vibrant domestic private credit ecosystem.

The Current active IPO are Srigee DLM, Manoj Jewellers, Wagons Learning, Kenrik Industries.

The Closed IPOs are  Arunaya Organic, Ather Energy, Iware Supplychain Services.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.