Credit markets have changed more profoundly in the past fifteen years than in the preceding half-century – and Toby Watson argues that investors who have not updated their understanding of how these markets work are carrying risks they may not fully recognise.
Credit markets sit at the heart of the global financial system, channelling capital from lenders to borrowers across every sector of the economy. Yet the structure of those markets has changed dramatically since the 2008 financial crisis – in ways that affect liquidity, pricing, risk distribution and the role of different participants. Toby Watson, whose career has been defined by deep expertise across multiple credit market segments, brings a perspective shaped by direct experience of how these markets have evolved and what that evolution means for portfolio construction today.
The credit market landscape that exists today is fundamentally different from the one that existed before 2008. The withdrawal of bank balance sheets from many areas of credit intermediation, the growth of private credit and the changing role of central banks have all contributed to a market structure that is less transparent, more fragmented and in some respects more fragile than its predecessor. Toby Watson has observed these structural changes closely throughout his career and sees a clear understanding of how modern credit markets function as a prerequisite for making sound investment decisions within them.
How Credit Markets Have Been Transformed Since 2008
The 2008 financial crisis was a watershed moment for credit markets. Higher capital requirements, tighter leverage constraints and more stringent liquidity rules made it considerably less attractive for banks to hold credit risk on their balance sheets, leading to a significant withdrawal of bank capacity from many segments of the credit market.
The vacuum left by retreating bank balance sheets was filled by a diverse range of non-bank lenders – private credit funds, insurance companies, pension funds, sovereign wealth funds and family offices all expanded their credit activities to capture the spreads that banks were no longer competing for. This shift from bank-intermediate to market-intermediate credit has been one of the defining structural changes in global finance since the crisis, and it has created a credit market that operates quite differently from its predecessor.
Toby Watson observed this transformation at close quarters. His work at Goldman Sachs spanned the period leading up to, through and after the 2008 crisis, providing direct experience of how credit market structure changed and what those changes meant for risk distribution, pricing and liquidity. That experience remains central to how Toby Watson evaluates credit opportunities today.
What Does the Shift Away from Bank Intermediation Mean for Investors?
The most important practical implication is that credit risk is now more widely distributed – but also less transparent and potentially less stable during periods of stress. Toby Watson, who spent nearly two decades at Goldman Sachs navigating credit markets across multiple cycles, has noted that the liquidity dynamics of non-bank credit markets differ fundamentally from those of bank-intermediate markets. The absence of a market maker of last resort in many private credit segments means that liquidity can evaporate quickly when risk appetite retreats, with consequences for pricing and exit options that investors need to understand before committing capital.
Toby Watson on the Rise of Private Credit
Perhaps the most significant development in credit markets over the past decade has been the growth of private credit – direct lending, mezzanine finance, asset-backed lending and other non-bank credit strategies that operate outside traditional bond and loan markets. From a relatively niche segment, private credit has grown into a multi-trillion dollar market that now rivals leveraged loans and high-yield bonds in terms of total capital deployed.
The drivers of this growth are well understood: yield-hungry investors seeking returns above those available in public credit markets, borrowers attracted by the certainty of direct lending relationships and the structural advantage of non-bank lenders in segments where regulatory constraints make bank participation uneconomic. Toby Watson’s perspective on private credit is shaped by his long career at Goldman Sachs and his current work as partner at Rampart Capital, where private credit features as a meaningful component of portfolio construction for clients with appropriate liquidity horizons.
The key distinction Toby Watson draws is between private credit that is genuinely backed by sound underwriting and tangible collateral, and private credit that has expanded into lower-quality segments as competitive pressure has compressed spreads and loosened lending standards. This distinction – familiar from the history of every credit cycle – is becoming increasingly relevant as the private credit market matures.
How Should Investors Approach Private Credit Today?
The private credit opportunity is real but requires careful navigation. Toby Watson has noted that the growth of the market has brought new participants whose underwriting standards and risk management capabilities vary considerably. Investors should evaluate private credit managers not just on historical returns but on the quality of their underwriting process, the composition of their loan books and their track record through periods of credit stress rather than just through the benign conditions that have characterised much of the past decade.
Structural Changes Worth Understanding
Several specific structural changes in credit markets merit attention:
- The growth of CLO markets has created a significant and relatively stable source of demand for leveraged loans, but it has also introduced structural complexity that affects how loan markets behave during periods of stress. Understanding CLO mechanics – triggers, reinvestment periods and tranche behaviour – is increasingly relevant for anyone with meaningful exposure to leveraged credit.
- The expansion of direct lending has created credit markets in many mid-market segments that did not previously exist in their current form. These markets offer genuine opportunities but carry liquidity and valuation risks that differ materially from those of public bond markets.
Toby Watson has consistently emphasised that structural knowledge of how specific credit markets operate is not optional for investors seeking to allocate to them – it is a prerequisite for understanding the risks being taken and the conditions under which those risks are most likely to materialise.
Toby Watson on Staying Ahead of Credit Market Evolution
Credit markets will continue to evolve. The next decade will likely bring further changes in the role of banks, the structure of private credit and the influence of technology on credit intermediation. Toby Watson’s perspective, informed by his experience at Goldman Sachs and his current work at Rampart Capital, is that the investors who navigate these changes most successfully will be those who invest in understanding the structural dynamics of credit markets rather than simply reacting to the returns they generate. In credit markets, genuine understanding remains the most durable competitive advantage – and Toby Watson’s career across some of the most complex environments in global finance reflects precisely that commitment.
