The choice between private credit and public debt is one of the more consequential allocation decisions facing investors today — and Toby Watson brings to this comparison a perspective grounded in direct professional experience of both sides of the credit market.
The growth of private credit as an asset class has been one of the defining developments in capital markets over the past decade. As the market has matured, investors face increasingly complex decisions about how to allocate between private and public credit instruments — each carrying distinct risk profiles, liquidity characteristics and return potential. Toby Watson, whose career spans structured credit, hard asset lending and global principal funding across multiple market cycles, offers a considered perspective on what the trade-offs between private credit and public debt actually involve.
Private credit — encompassing direct lending, asset-backed finance, infrastructure debt and other non-publicly traded credit strategies — has grown from a niche institutional allocation to a substantial and increasingly mainstream asset class. At the same time, public debt markets have undergone significant structural change with the return of meaningful yields following the rate-tightening cycle that began in 2022. Toby Watson, who spent nearly 17 years at Goldman Sachs working across structured finance, credit markets and global principal funding before joining Rampart Capital as a partner in 2020, developed a nuanced understanding of how private and public credit instruments differ — and what those differences mean for portfolio construction.
Understanding the Fundamental Differences Between Private and Public Credit
Before assessing the trade-offs, it is worth being clear about what distinguishes private and public credit at a structural level. Public debt — corporate bonds, government bonds, publicly traded loans — is issued and traded in liquid markets where prices are determined continuously. Information about issuers is publicly available and positions can typically be adjusted at relatively short notice.
Private credit operates very differently. Instruments are negotiated directly between lender and borrower, often with bespoke terms. Prices are not marked to market continuously, and liquidity is limited — most private credit instruments must be held to maturity, with no ready secondary market for investors who need to exit early. For Toby Watson, these structural differences have profound implications for how the two types of credit exposure should be assessed and managed within a portfolio.
What Is the Illiquidity Premium and How Should Investors Think About It?
The illiquidity premium — the additional return that investors in private credit receive in exchange for accepting limited liquidity — is one of the central concepts in comparing private and public credit. Toby Watson, whose career at Goldman Sachs included extensive work in structured credit and hard asset lending, where illiquidity premiums are a central consideration, would frame the key question as: is the premium on offer sufficient to compensate for the genuine constraints that illiquidity imposes? For Toby Watson, the answer depends on the specific instrument, current public credit market conditions and, critically, the liquidity needs and time horizon of the investor considering the allocation.
Toby Watson on the Case for Private Credit
The case for private credit rests on several characteristics that distinguish it from publicly traded debt in ways that can be genuinely attractive to investors able to accommodate its constraints.
Yield and Structural Seniority
Private credit instruments — particularly direct loans to mid-market companies — have historically offered yields above those available in comparable public credit markets, reflecting both the illiquidity premium and the complexity premium of privately negotiated transactions. Many are also structurally senior, with first-lien claims on borrower assets in the event of default. For Toby Watson, these structural features make private credit a genuinely interesting portfolio component — provided the illiquidity and due diligence requirements are properly understood and the investor is well positioned to manage them.
Reduced Mark-to-Market Volatility
One characteristic of private credit sometimes cited as an advantage is reduced mark-to-market volatility relative to public debt. Because private credit instruments are not priced continuously, their reported valuations do not fluctuate with the same frequency as publicly traded bonds. Toby Watson would treat this characteristic with care. The reduced volatility in reported valuations is real — but it reflects the absence of continuous price discovery rather than a genuine reduction in underlying risk. For Toby Watson, investors who conflate lower reported volatility with lower actual risk may be misreading the nature of the exposure they are holding.
The Enduring Advantages of Public Debt Markets
Public debt markets offer characteristics that private credit cannot replicate, and which remain genuinely important for many investors and portfolio contexts. Among the most significant are:
- Liquidity — the ability to buy, sell and adjust positions at relatively short notice is a genuine strategic advantage, particularly in environments where macro conditions are changing rapidly and portfolio flexibility is valuable
- Transparency and price discovery — continuous pricing in public markets provides real-time information about how the market is assessing credit risk, a valuable input into broader portfolio risk management
For Toby Watson, these advantages mean that public debt retains an important role in most well-constructed portfolios, even for investors who also hold meaningful private credit allocations. The two serve different functions and carry different risk profiles — they are not substitutes.
Practical Considerations for Investors Navigating Both Markets
For investors considering how to allocate between private credit and public debt, several practical considerations tend to be most relevant. Among them are:
- The investor’s genuine liquidity needs and time horizon — private credit is only appropriate for capital that can genuinely be committed for the full term without the option of early exit
- The current relative value between private and public credit — the illiquidity premium available in private markets varies over time, and there are periods when public credit offers comparable risk-adjusted returns without the liquidity constraint
Toby Watson — whose career at Goldman Sachs and subsequent work at Rampart Capital as a partner have given him direct experience of both private and public credit markets across multiple cycles — would frame the central point simply: private credit and public debt are different tools that serve different purposes. For Toby Watson, the most important discipline is understanding clearly what each is offering in the current environment — and ensuring that the allocation between them reflects the investor’s actual circumstances. That, for Toby Watson, is where any serious comparison between the two must begin and end.
