The dollar's power is at risk, private debt is booming, and capex is on shaky ground: Harvard's Victoria Ivashina

US dollar

As global markets debate the potential fallout of Trump tariffs, Victoria Ivashina believes it's too soon to call a full-blown growth slowdown. The market, she says, is pricing in uncertainty—not an earnings collapse. The evolution of macro conditions will determine whether high or low interest rates prevail, as history offers evidence in support of both regimes.

But amid all the noise in equity markets, it is private debt that's quietly emerging as a powerful force, drawing significant capital from institutional investors and reshaping corporate fundraising. Ivashina, the Lovett-Learned Professor of Finance and Head of the Finance Unit at Harvard Business School, shares her insights in a wide-ranging conversation with N Mahalakshmi, covering everything from macro trends to the ascent of alternative assets.

Here are some edited excerpts from the conversation:

What is your assessment of the Trump tariff and its impact?

Look, I think Capex is typically a long-term investment. All Capex —whether private or public—is a bet on your ability to recover money from a significant upfront investment. Until the environment stabilises, it’s hard to justify such bets. That’s the contradiction in the sequence, even within the U.S. If tariffs are meant to incentivize local production, that still requires building factories, which takes time and capital. But this is happening in an environment full of uncertainty, making it very complex.

So regardless of whether there will be a pause on tariffs or not, the level and nature of uncertainty—its unprecedented economic consequences—means financial decision-makers are likely to hold back. Capex requires a long-term outlook and a return profile. Right now, that visibility just isn't there. Also, it's not like we have idle factories waiting to be switched on in the U.S. We need to build them. There's a disconnect here in terms of what the tariffs hope to achieve and what it ends up doing.

Does this shift global capital flows? The U.S. has historically attracted over 60% of global investment. Yet now, in a rare move, money seems to be flowing away from the U.S. despite uncertainty—a time when it usually flows in.

Capital flows are influenced by many factors. One is the perception of safety—as you mentioned. Another is the structural role the dollar plays in the global economy. It’s often used as a transaction currency even between countries not involving the U.S. So demand for dollars has historically been high, both for safety and convenience.

Now, both those dimensions feel slightly at risk. I don't have perfect visibility into what comes next, but it's clear the U.S. has benefited from the dollar's privileged role. If that breaks in a systematic way, it will impact capital inflows, reserve currency status, and transactional dominance.

That said, it’s hard to disrupt that role easily. Uncertainty alone may not be enough to permanently shift it. But yes, it’s at stake.

So what, if anything, is changing fundamentally?

As of now, it’s the introduction of uncertainty that matters. It’s not something you can reverse overnight. Think about COVID—it disrupted supply chains for reasons unrelated to trade. Now, uncertainty around pricing and economic direction is putting pressure on supply chains again. While this may not be permanent, it could be disruptive over a longer period.

Some companies could go into distress due to this uncertainty, and that might translate into deeper supply chain issues. Right now, it’s a pause and uncertainty, but it could escalate.

What’s your outlook on interest rates? Jamie Dimon, Howard Marks and others suggest we’re in a "higher-for-longer" era. Is sub-3% now a thing of the past?

Yes, by historical standards, near-zero rates were abnormal. That era looks like an aberration. But it's more complicated. If we hit a recession, what tool do we use? Historically, the answer has been rate cuts.

So it’s tricky. History supports both views. Interest rate forecasts are common, but I don’t think anyone has a strongly differentiated view. It’s conditional on macro developments.

What's your view on U.S. corporate profitability? It's at historic highs. Where are we in the cycle, and what does this mean for equity valuations?

Profitability is rooted in innovation—either through products or firm-level efficiency. Apart from recent macro instability, we've seen major tech advances that could drive future productivity and profitability. That aligns with the market’s earlier run-up and valuations.

We haven't seen new data suggesting that innovation or efficiency fundamentals are impaired. The market is pricing in macro uncertainty, not an earnings collapse.

Moreover, financial innovation is helping. The rise of private debt opens up funding for high-growth companies that previously relied only on equity. This lowers the cost of capital for them.

So, with tangible technological advances, faster adoption cycles, and more accessible financing, the economic outlook—absent recent events—was quite positive.

What kind of financial innovations are you talking about?

For example, let's talk about private debt. Private debt is often naively perceived as a simple replacement for banks—bankers out, private debt in. There is some truth to that, especially in areas where private debt competes directly with banks. But a significant part of what private debt does is operate in underexplored spaces. For example, if you think about fast-growing software companies, they typically aren’t generating positive free cash flows. Their EBITDA is nowhere close to what we see in manufacturing firms. Yet, private debt financing has been active in this space. There have been technological advances in assessing credit risk, especially for companies that are growing fast but not yet profitable. A large portion of private debt financing is based on recurrent revenue financing rather than traditional EBITDA-based financing.

Okay, so largely venture debt kind of, is that what you're saying?

Venture debt is a very small segment of private debt. I mean private debt in the broader sense of direct lending. Venture debt is a slightly different form of financing and more closely tied to replacing venture equity investments. Private debt, broadly speaking, is much bigger.

And can you give some insights on what kind of new structuring has come about and what are some takeaways for India in terms of structuring private capital?

All types of debt issuance involve assessing credit risk. One concrete example is recurrent revenue lending, which isn’t done by banks. Traditionally, companies with fast growth and positive client-level profitability, but negative aggregate profitability due to high client acquisition costs, were only equity-financed. The ability to cut through that and assess business models from a credit perspective is a significant innovation. Thinking about credit risk more like equity investors do is key. Traditionally, credit risk meant having hard collateral. The next evolution was relying on cash flow. Now, we go a step further: assess the business model, understand the purpose of the funding, and identify levers to mitigate credit risk.

Unlike banks, private debt investors can think like equity holders. While they are in a senior position and don’t get all the upside, they can structure debt flexibly. Bank products are standard and cookie-cutter. Private debt, however, can include covenants that adapt over time—switching from recurrent revenue to EBITDA-based covenants, for instance. That flexibility helps manage risk.

So the proposition is more like the junk bond markets? High risk, high yields?

It’s very different from the junk bond market. In absence of private debt, high-yield debt was serviced by broadly syndicated loans or junk bonds. These markets are complementary and expand or contract based on the cycle. For instance, when the syndicated loan market contracted in 2008, the junk bond market expanded.

Now there is a third leg: private debt. It’s still smaller than syndicated loans or junk bonds, but very different. When high inflation and rising rates made flexible financing valuable, private debt gained share. Companies sitting on variable-rate debt sought flexibility. Private debt offered products with custom structures and clear restructuring paths, unlike syndicated loans or bonds, where distressed investors complicate restructuring.

Private debt gained traction because counterparties understand each other and can work through cycles. Like in 2008, when syndicated loans and junk bonds alternated, private debt now fills a similar role. These aren’t substitutes but complementary markets. In normal times, they sort themselves based on the type of company. In downturns, they support one another, reacting differently to various shocks.

How big is the private debt market in the US, and where does India stand?

The US private debt market is fast growing—latest estimates put it at $1.5 trillion. It has grown rapidly as alternative investing shifts from equity to debt. The market existed pre-2008 in limited form. Structures like BDCs (BDC, or Business Development Company, is a type of publicly traded investment vehicle in the United States that provides capital to small and mid-sized private companies—often those that are not large enough to access traditional public markets or bank financing) existed before the financial crisis, but the real growth began post-2008. Blackstone, for example, expanded significantly in 2008 through its acquisition of GSO capital Partners, which became its credit arm.

Emerging markets like India face unique constraints. First, efficient restructuring systems are essential for debt markets. In Europe, for instance, bond markets are small because restructuring systems are fragmented. Bank lending dominates. In emerging markets, restructuring is often slow and value-destructive. Liquidation is more common than resolution.

Second, capital fundraising for alternatives remains concentrated in the US and parts of Europe. Emerging markets have had a complicated history with alternatives. Currency devaluation and economic instability deter long-term commitments. Building stable, local operations is hard due to frequent exits and re-entries.

There is hope that this time will be different. We see a new wave of alternative capital entering emerging markets, but historical patterns have been rocky.

What trends do you see in large global funds – the pension and endowment funds, sovereign wealth funds and so on…

After 2008, the low-rate environment led long-term allocators like pension funds, endowments, and sovereign wealth funds to shift toward illiquids and alternatives. Typically, around 10% or more of portfolios went into alternatives, mainly growth equity and buyouts, and increasingly into private debt.

How much of this went into venture funding? And given rising rates now, does that funding environment still support huge start-up funding?

That’s a complex question, but I’ll try to simplify. Yes, low interest rates played a big role in the rise of private debt and increased allocations to alternatives. But a rise in rates doesn’t automatically undo everything. It helped jumpstart these markets. Pension funds now have the infrastructure to support alternatives. Private debt is competitive and maturing. It offers different value propositions than other asset classes.

Pension funds aren’t retreating from alternatives. They’ve dialled up exposure and are maintaining it. It’s not a question of reducing from 15% to 2%, but more about tweaking allocations between equity and debt. Alternatives now play a structural role in portfolios. Private debt is here to stay. Private equity might see internal firm-level changes, but the asset class itself is not shrinking.