What We Are Watching
Financial Markets · Mid-Market
The Cost of Capital Has Shifted — and It Is Not Coming Back
Private credit has grown into a $1.7 trillion market and it is repricing. For mid-market companies whose growth strategies were built around cheap leverage, the strategic conversation is no longer about financing. It is about whether the business generates returns that justify investment regardless of how it is financed.
1/15/2026
What We Are Watching is Vaxa's signal intelligence column. We identify markets, technologies, and structural shifts already in motion but may not yet reached the corporate strategy conversation.
highlights
01
Private credit has grown from a niche asset class to a $1.7 trillion market — and the terms are tightening
02
Mid-market companies that borrowed at favorable rates now face refinancing into a structurally different environment
03
The cost of capital shift is not cyclical — it reflects a structural repricing of private credit risk
04
Growth strategies built around cheap leverage need to be rethought, not paused
05
The companies navigating this well are separating organic growth capability from financial engineering
Signal
Private credit has undergone a structural transformation over the past decade. What began as an alternative to syndicated bank loans for mid-market companies — faster, more flexible, relationship-driven — has grown into a $1.7 trillion asset class that now accounts for a significant share of corporate lending outside the public markets.
That growth was fueled by a specific set of conditions: compressed yields in public fixed income, institutional appetite for yield premium, and a decade of historically low base rates that made the cost of private debt manageable for borrowers.
Those conditions have shifted. Base rates have moved materially. Credit spreads in private markets have widened selectively. The covenant packages that borrowers negotiated at the peak of the market are now being tested by operating performance that assumed a different environment.
The test of a growth strategy is whether it works when the financial environment it was built around changes. Many mid-market growth strategies are facing that test now.
Pattern
The structural shift is not simply that rates are higher. It is that the relationship between operating performance and credit availability — which was unusually forgiving during the low-rate period — has normalized in ways that reveal the underlying quality of individual credit situations more clearly.
Companies that refinanced or issued debt at the peak of favorable conditions are now approaching maturity walls in a market where the same capital is available at materially higher cost, with tighter covenant structures, and from lenders who have more choice about where to deploy.
The capital did not disappear. It got more expensive, more selective, and less patient — and mid-market borrowers have the least room to absorb all three at once.
Mechanism
Mid-market companies face this environment with less flexibility than larger borrowers. Public markets are not an option for most. Private credit — the same asset class that is repricing — is often the only realistic source of capital needed to refinance existing obligations or fund the next phase of growth.
For PE-backed companies, the dynamic is compounded by fund life considerations. The window for value-creation measured in financial engineering has narrowed considerably.
Leverage was never the strategy. It was the assumption underneath the strategy — and assumptions this specific rarely survive a decade unchanged.
Implication
The companies navigating this environment well share a common characteristic: they separated organic growth capability from financial engineering before the repricing happened.
They built businesses that generate returns on invested capital independent of how those investments are financed. The leverage was a tool, not the strategy.
The leverage wasn't wrong. Treating it as permanent was.
Question
This is where growth strategy and capital strategy intersect in a way that is usually treated as two separate conversations. Vaxa's view is that they are the same conversation — that the markets a company enters, the capabilities it builds, and the revenue model it operates are all factors in whether the business can sustain growth when the financial conditions that made the last phase of growth possible are no longer available.
The businesses that survive a repricing cycle were usually built to survive one before it arrived.
The question to ask.
Is your growth strategy dependent on financial conditions that have changed — or is it generating the returns that justify investment regardless of how it is financed?