Liquidity is rarely the most exciting topic in wealth management – but Toby Watson argues it is one of the most consequential, and one that too many portfolios treat as an afterthought until it is too late.
Liquidity management sits at the intersection of portfolio construction and risk management, yet it rarely receives the attention it deserves in private wealth contexts. Investors are often drawn to illiquid assets by the promise of premium returns, without fully accounting for the constraints those assets impose when circumstances change. Toby Watson, whose career has spanned some of the most liquidity-sensitive environments in global finance, brings a disciplined and practical framework to this often-overlooked dimension of portfolio management.
Liquidity in a wealth portfolio means different things in different contexts. At its most basic, it refers to the ability to convert assets into cash without significant loss of value and within a reasonable timeframe. In practice, liquidity exists on a spectrum – from overnight cash and money market instruments at one end, through listed equities and bonds, to private equity, infrastructure and direct real estate at the other. Toby Watson has engaged with liquidity management throughout his career, from his years handling large-scale capital deployment at Goldman Sachs to his current role as partner at Rampart Capital, where liquidity is treated as an active portfolio dimension rather than a residual consideration.
Why Liquidity Management Matters More Than Most Investors Realise
The case for taking liquidity seriously is most clearly made by what happens when it is ignored. Investors who committed heavily to illiquid assets during the low-rate era of the 2010s often found themselves constrained during the sharp market moves of 2022 – unable to rebalance, unable to take advantage of repriced opportunities and in some cases under pressure to sell liquid assets at inopportune moments simply to meet obligations elsewhere in their portfolios.
This is not a theoretical concern. It plays out repeatedly across market cycles, in different forms but driven by the same underlying dynamic: portfolios constructed with insufficient attention to liquidity become inflexible precisely when flexibility matters most. Toby Watson has consistently emphasised that liquidity is not simply a defensive consideration – it is also an offensive one. Investors with adequate liquidity reserves are positioned to act during dislocations, when assets reprice and the most compelling opportunities tend to emerge.
How Should Investors Think About Their Liquidity Needs?
Liquidity needs are not static, and Toby Watson has argued that the starting point for any serious liquidity framework is a clear-eyed assessment of when and under what circumstances capital might be required. This means thinking through both predictable liquidity needs – income requirements, planned capital expenditures, tax liabilities – and unpredictable ones, including the possibility of market stress that creates either obligations or opportunities requiring rapid response. Toby Watson, whose years at Goldman Sachs involved managing liquidity across large and complex balance sheets, brings a structured approach to this assessment that translates directly to private wealth portfolio management.
Toby Watson’s Framework for Liquidity Allocation
Toby Watson approaches liquidity allocation through a tiered framework that maps different pools of capital to different time horizons and purposes. The first tier covers immediate and short-term needs – cash, money market instruments and short-duration bonds that can be accessed quickly and without meaningful loss of value. This tier is not designed to generate returns; it is designed to provide certainty.
The second tier covers medium-term needs and opportunistic capital – liquid investments in public markets that can be realised within days or weeks if required, but that are otherwise managed for return. This tier benefits from the liquidity premium available in public markets and provides the flexibility to respond to market developments without disrupting the longer-term portfolio.
The third tier covers genuine long-term capital – illiquid investments in private equity, infrastructure, private credit and direct assets that carry a deliberate illiquidity premium. Toby Watson has noted that this capital should only be committed to the extent that the investor is genuinely comfortable leaving it locked up for the full duration of the investment, including through periods of market stress. The discipline lies in maintaining the boundaries between these tiers, rather than allowing the illiquidity creep that tends to occur when investors shift progressively more capital into the third tier without adjusting their liquidity framework accordingly.
Illiquidity Creep and How to Avoid It
Illiquidity creep is one of the most common structural problems in private wealth portfolios. It happens gradually – each individual allocation to a private market fund or direct investment seems reasonable in isolation, but over time the cumulative effect is a portfolio in which the liquid portion is insufficient to meet realistic needs. Toby Watson has noted that this problem is particularly prevalent in environments where private market returns have been strong because the success of existing illiquid positions creates an incentive to add more. The antidote is a disciplined framework that sets explicit limits on illiquid allocations relative to total portfolio size and liquidity needs.
Liquidity Risk in Specific Asset Classes
Different asset classes present different liquidity profiles, and understanding these distinctions is central to effective liquidity management:
- Private equity and venture capital are typically locked up for seven to ten years, with limited secondary market options that often involve significant discounts to NAV. Capital calls can also create liquidity demands at unpredictable times, requiring investors to maintain reserves specifically to meet unfunded commitments.
- Real estate and infrastructure vary considerably in their liquidity profile depending on whether the exposure is held through listed vehicles, unlisted funds or direct ownership. Direct ownership in particular can be extremely illiquid in stressed market conditions, where transaction volumes fall and pricing becomes uncertain.
Toby Watson has argued that the liquidity profile of each asset class should be assessed not just under normal conditions but under stress – because it is precisely in stressed conditions that liquidity constraints become binding and the true cost of illiquidity is revealed.
Toby Watson on Liquidity as a Portfolio Discipline
At Rampart Capital, where Toby Watson serves as partner, liquidity management is embedded in the portfolio construction process from the outset rather than addressed as an afterthought. This reflects a conviction developed across Toby Watson’s long career at Goldman Sachs and beyond: that the ability to act – whether defensively or opportunistically – is itself a source of long-term value that deserves to be actively managed and protected.
Toby Watson’s perspective on liquidity is ultimately straightforward. Portfolios that maintain genuine flexibility tend to outperform over full market cycles, not because liquidity itself generates returns, but because it preserves the optionality to make better decisions when conditions change. In wealth management, that optionality is worth considerably more than most investors give it credit for.
