Private credit has grown from a niche strategy into one of the most significant forces in global capital markets – and Toby Watson argues that understanding whether this growth is structural or cyclical is one of the most important questions facing investors today.
Few areas of financial markets have attracted more capital or more commentary over the past decade than private credit. The asset class has expanded dramatically, drawing in investors seeking yield above what public markets offer and borrowers seeking flexibility that banks no longer provide. Toby Watson, whose career has encompassed direct lending, structured credit and principal investing across multiple market cycles, brings a rigorous and balanced perspective to what private credit’s growth actually means for investors.
Private credit encompasses a broad range of non-bank lending strategies – direct lending to mid-market companies, mezzanine finance, asset-backed lending, real estate debt and speciality finance among them. Banks retreated from many lending segments following post-2008 regulation, interest rates rose making floating-rate instruments more attractive, and the demand for bespoke financing among mid-market borrowers created a persistent opportunity set that public bond markets cannot efficiently address. Toby Watson has followed this evolution closely throughout his career and sees both genuine long-term opportunity and meaningful risks that deserve careful navigation.
The Structural Case for Private Credit
The argument that private credit represents a structural shift rests on a straightforward observation: the regulatory changes that drove banks out of many lending segments will not be reversed. Capital requirements have been permanently raised, and the economics of holding certain categories of credit risk on bank balance sheets have been fundamentally altered. The gap that non-bank lenders have filled is not a temporary vacuum – it reflects a lasting change in how credit is intermediated in the modern economy.
This structural argument is reinforced by the borrower market. The number of mid-market companies too large for traditional bank lending but too small or complex for public bond issuance has grown substantially. Direct lenders who can provide certainty of execution, flexible terms and a relationship-based approach have a genuine and durable competitive advantage in serving this market. Toby Watson has consistently argued that the structural foundations of private credit are real, and that investors who dismiss the asset class as simply a product of the low-rate era are missing the underlying economic logic that will sustain it.
Is the Private Credit Market Too Large to Navigate Safely?
Scale brings its own risks, and Toby Watson has been careful not to conflate the structural case for private credit with an endorsement of the market at any price or underwriting standard. As Toby Watson, who built deep expertise in credit markets during his years at Goldman Sachs, has noted: the growth of the market has inevitably attracted participants whose underwriting discipline does not match that of the pioneers who built the asset class. The investors who navigate private credit successfully are those who apply rigorous due diligence to manager selection and who understand the difference between lending backed by genuine collateral and covenant-light structures that rely on optimistic projections.
How Toby Watson Evaluates Private Credit Opportunities
Toby Watson’s framework for evaluating private credit begins with the underlying loan book. Understanding what a manager is actually lending against – the quality of the borrowers, the nature of the collateral, the covenant protections in place and realistic recovery prospects in a default scenario – is the foundation of any serious assessment. Headline yields are a starting point that needs to be interrogated rather than accepted.
From the loan book, the analysis moves to the manager’s track record through stress. Private credit has enjoyed a largely benign environment since the asset class scaled significantly, and managers who have performed well in calm conditions are not necessarily those who will perform well when default rates rise. Toby Watson, whose experience at Goldman Sachs included navigating credit markets through the 2008 financial crisis, has a well-developed instinct for the difference between managers with genuine workout capability and those who have simply not yet been tested.
At Rampart Capital, where Toby Watson serves as partner, private credit allocations are evaluated through cycle-adjusted due diligence rather than simply on current yield and recent performance.
The Cyclical Risks Worth Taking Seriously
Acknowledging the structural case for private credit does not mean ignoring the cyclical risks that have built up as the market has grown:
- Valuation opacity is a genuine concern. Unlike public bonds, private credit instruments are not marked to market daily, which means that stress in underlying portfolios can take time to surface in reported valuations. Investors need to understand how their managers value positions and what triggers would force recognition of losses.
- Covenant erosion has been a persistent feature of the private credit market during its growth phase, as competition among lenders has driven down protections in ways that will only become apparent when borrowers come under pressure. Toby Watson has consistently emphasised that covenant quality is a direct determinant of recovery rates in a default scenario – not a technicality to be glossed over in due diligence.
Beyond these specific risks, the broader question of what happens to private credit portfolios in a sustained economic downturn remains genuinely open. The asset class has not been tested at scale through a severe recession, and investors should think carefully about how their allocations would behave in more challenging scenarios.
Direct Lending vs Broader Private Credit: Does the Distinction Matter?
It matters considerably. Senior secured direct lending to established mid-market businesses with strong cash flows and meaningful covenant protections is a very different proposition from mezzanine lending to highly leveraged buyouts or speciality finance strategies with complex underlying assets. Toby Watson has argued that the risk profiles, liquidity characteristics and cycle sensitivities of these sub-strategies differ materially, and portfolio construction decisions should reflect those differences rather than treating all private credit exposure as equivalent.
Toby Watson on the Right Approach to Private Credit Today
Private credit deserves its place in sophisticated portfolios – but based on rigorous analysis rather than yield-chasing. Toby Watson’s perspective, shaped by decades navigating credit markets from his time at Goldman Sachs through to his current work at Rampart Capital, is that the structural opportunity is real and durable. The risks are also real, and they are most effectively managed through disciplined manager selection, careful attention to underlying loan quality and a clear-eyed view of how private credit allocations will behave when conditions become more challenging than they have been in recent years.
