Private markets: The Red Thread – Alternatives

Why conviction-based allocation is gaining ground in private markets

The global environment is marked by an accumulation of structural uncertainties that are proving persistent. Geopolitical tensions – from protracted conflicts and an increasingly fragmented world order to new trade barriers – are exerting an increasingly destabilizing effect on the real economy and capital markets. What was once treated as a transitory shock has become a permanent condition of elevated uncertainty.

At the same time, financial markets themselves have fundamentally changed. Volatility is no longer merely cyclical, but structurally higher. In particular, business models that were long considered stable are coming under pressure. The rapid development of artificial intelligence is challenging established software and platform models: margins, pricing power, and barriers to entry are evolving faster than many financial models are able to reflect.

These shifts are now feeding through to private markets. Private credit, once seen as a relatively predictable source of stable returns, is now being reassessed more critically. Rising complexity in capital structures, altered cash flow profiles among borrowers, and growing competition are compressing margins and increasing the risk of mispricing.

Why ‘buy and hold’ falls short in private markets

Against this backdrop, it is becoming clear that illiquidity does not preclude the need for active risk allocation. Active portfolio management in private markets is not about frequent trading, which remains constrained by design. It is about deliberate, ongoing decisions on allocation and weighting, guided by clearly defined convictions.

A useful framework comes from Grinold and Kahn, who argue that long‑term excess returns are not driven by a handful of large, binary bets but by many independent, well‑considered decisions with positive expected value. Applied to private markets, this means that the critical mistake would be to switch entire asset classes on or off – such as a blanket decision of ‘private credit: yes or no.’

Instead, resilience comes from differentiation within private equity, private credit, real estate and infrastructure – by strategy, manager quality, capital structure, cycle positioning and liquidity profile. A portfolio built on many smaller, diversified convictions is typically more robust than one shaped by a few sweeping decisions.

From this logic, three core principles follow:

In this environment, conviction-based allocation is gaining importance. This approach is built on grounding every strategic and tactical positioning in clearly articulated convictions, which are reviewed on a regular basis.

In practice, this involves assessing investments across five dimensions:

Performance
The focus is not merely on expected returns, but on their underlying drivers: sources of growth, the quality and sustainability of margins, exit conditions and realizations in current market circumstances.

Manager
Differences in manager quality and resilience become most apparent during periods of stress, reinforcing the case for active selection. These distinctions are best assessed through objective, historically grounded quantitative evidence.

Environment
Macroeconomic conditions, interest‑rate and spread levels, sector dynamics and geopolitical factors shape outcomes materially. A compelling strategy operating against unfavorable macro conditions may warrant less capital than a solid approach benefiting from supportive tailwinds.

Specific risk
Leverage, debt-servicing capacity, diversification, concentration risks, and the quality of underlying assets. Risk is best understood as an aggregation at the individual asset level, particularly when viewed through the lens of stress scenarios.

Liquidity
Capital lock‑up periods, redemption terms, access to secondary markets and investor composition materially influence portfolio flexibility. Liquidity is not a binary feature, but a continuum that calls for active management.

Bringing these dimensions together yields a weighted conviction – not a fixed classification, but a dynamic judgment that evolves over time as new data becomes available. Allocations are not simply ‘held’, but are consciously overweighted or underweighted as convictions change.

Being active means choosing – not betting
In a world of persistent uncertainty, passivity itself becomes a source of risk. Particularly in private markets, where capital is tied up for long periods, success depends on implementing the right convictions systematically, in a diversified and disciplined manner.

Active portfolio management, in this sense, is about acting on evidence. Over time, the cumulative impact of many small, well‑founded decisions tends to outweigh a handful of large bets, even as portfolios undergo meaningful reallocation. This is how UBS seeks to support its private market investors in uncertain times.