What does the situation in Iran mean for markets?

Vaughan Nelson CIO and CEO Chris Wallis discusses the implications of the evolving conflict in Iran for capital markets as well as the AI-related software sell offs and recent developments and issues in private credit.

Podcast recorded on 4 March 2026

This is a lightly edited transcript from the podcast

Dan Hughes: Welcome to the Vaughan Nelson Podcast. With me today is CEO and CIO Chris Wallis. Welcome, Chris.

Chris Wallis: It's great to be here, Dan.

Dan: All right, Chris, good to have you back in what's been a really quite eventful week so far in the last couple of days with the US and Israeli attack on Iran. Thinking about it from the scope of investing, how do you think investors should start thinking about this conflict, and is there anything that you've incorporated with respect to the event in your decision-making?

Chris: I think the most important thing for an investor to consider is just the increased uncertainty that such geopolitical events have. Nobody has any idea how this is going to play out. They certainly don't understand the unintended consequences of it. Our approach to this is, look, understand the trends that were in place prior to the event. How does the event influence those trends? We were bullish medium-term on energy prices. This has caused a run-up in energy prices. Hey, don't chase it, but just understand that underlying bullish sentiment for energy was already in place. Just be sure you don't get caught up in too much of the hysteria. I think to the extent this is short-lived, you can almost ignore it, meaning if the activities are short-lived, you can ignore it.

My own personal view is that these are not short-lived.

Really probably to prevent a larger conflict later, but to the extent there is a conflict, that we're in a better position.

I think that's why we've made the move in Venezuela. It's why we're making the move in Mexico against the cartels. It's why there was actually activity that began in Ecuador today. And so I think Iran's just another piece of the puzzle for the US. For Israel, I think it's very different. I think they made the decision they were going to take Iran out back when they were attacked over a year ago. So I don't think this is going to stop.

My view is this is about gaining control of the Strait of Hormuz. So if we get boots on the ground, it's going to be to control that strait. So we'll decide what goes through there rather than a Chinese proxy deciding what gets through the strait and what doesn't.

So I don't know that it necessarily changes the direction of anything. We just have to see what's happening. I know there's a lot of confidence with the success that Iran and the US have had in the opening days of this military campaign, but these things have a way of compounding and have second derivative impacts. We don't really appreciate to what degree Iran's just having a kind of a rope-a-dope strategy and going to wait it out.

And certainly as we bring in other regional players and we change kind of these choke points and different vulnerabilities, then these things just have unintended consequences and can quietly spin out of control. So I don't think this is going to be short-lived, even if the military campaign winds down. I like to say for every mile of road, there are two miles of ditches. And when you're heading down a treacherous road, the idea that you're going to turn around and not end up in a ditch is usually not the case. So I think all we're going to do is move forward from this. We can't reverse it. And so we're going to have to deal with the unintended consequences over the short to intermediate term.

Dan: And then, prior to what we saw with the attack on Iran, business headlines, market action, those were, for the last few weeks, really dominated by the death of what we would call, enterprise software and some of that related upending of other services by AI. And then also we saw a lot about developing negative credit events, illiquid private credit funds, publicly traded BDCs. So, shifting a little bit here, two questions. First, do you think that the sell-off in software and other industries were negatively impacted by AI headlines that would create some opportunities here? Or the second part of this question is, what's your perspective on the disruptions presented by new AI tools and products?

Chris: Yeah. So let's just talk about the impact of AI and let's think about where we are. The AI narrative is driven by the need to continuously raise capital. We have both OpenAI and Anthropic trying to go public. They need to create the demand for their public share offering and for their capital raising. So you're going to hear very bullish sentiment coming out of these companies and be supported by the financial press, by Wall Street, by the venture capital community, because they're all looking for liquidity, so they're looking for some exit liquidity. So from that perspective, we need to kind of dampen down or tamp down the exuberance that AI is just going to take over everything. I think it's easy to see that AI is going to have a significant impact on enterprise software, not just in product competitive positioning, but how it's priced.

It's easy to see that there are going to be structural issues there, and that to the extent it may spill over into private credit, and I'm sure we'll get to that in just a second, that it's going to have negative consequences. And so everything has sold off, and everything related to the new products being rolled out by AI have sold off. We saw it have a huge impact on IBM when they rolled out a product that effectively makes some of IBM's most lucrative consulting business a lot more efficient. So again, we're going to reprice that.

So the sell-off is somewhat justified in enterprise software for sure and in other areas. And yes, it's creating opportunities. That doesn't mean just because Salesforce sold off, you go out and try to buy it; I think that's a mistake.

But even in enterprise software, look, there's still a lot of funny games they're playing with stock-based compensation and elsewhere, and these stocks aren't table-pounding cheap by any stretch of the imagination.

I think technology, the AI technology is going to be incredibly disruptive in the tech sector. So whether that's software, consulting, tools, and things like that, I think we're going to see a lot of that. I think some of the announced layoffs that we've seen, while they grab headlines, they're probably less AI-driven and just driven by poor corporate management in a bloated employment base. At the same time, where I think it's going to start to spill out outside of tech initially, it's going to be in compliance functions, audit functions, it's going to be in the back office initially, and those are going to be real opportunities, and they're going to drive cost savings, and that'll be some temporary margin improvement, and that'll all get competed away via price in order to gain market share. So, I think it's going to create a lot of volatility. I always embrace volatility.

So when you get these kinds of dislocations, we're going to get some pretty attractive shots on goal, but it'll be fairly narrow, fairly company-specific, and I don't think it'll be broadly sector-based.

Dan: Yeah. And then a few more questions here on the private credit space. So, Blue Owl, Blackstone, right? We've seen some unlisted private credit funds that were hit with pretty substantial redemptions. We saw Blue Owl, they were forced to liquidate some assets and halt some further redemptions. And then Blackstone, right? They were, they were limiting redemptions, but they had to fund some of these redemptions out of pocket. So, do you think these issues that we're seeing here in private credit are more one-off, or do you think this is a bit more and will spill into some other sectors?

Chris: Yeah.

I think what's happening in private credit should not be unexpected, and we're in the discovery phase, meaning we know we have issues there, and what we're trying to discover is the breadth and depth and severity of those issues. And I think it's worth thinking through where we've come from and why they're presenting themselves. So private equity kind of ran out of market capacity for their traditional private equity products as institutional allocations were full. They kind of tapped into the private sector that was available to them. So they went after the private credit market and direct lending market in size, beginning about two years ago. And while private credit isn't new, and private equity's involvement isn't new, moving it in and putting illiquid assets into liquid structures, like they've done in Blue Owl and elsewhere, have created a duration mismatch. And inevitably, when you get a duration mismatch, you're going to end up with a run on the bank.

And so what we're seeing now is a run on the bank. And so Blue Owl is having its issues, others are as well. I think Blackstone had to dig into their own pocket in order to fund some of these redemptions. Those redemptions have started, and they're going to run their course until they burn themselves out. The underlying issue within private credit is, they went out and financed a lot of software activity, and that's caused the initial concerns, and there are going to be real losses. As we said, they've levered these entities up. I've seen stats that out of 7,000 credits out there, some 38% have seen sequential double-digit declines in EBITDA, so their leverage has increased. In the case of Blue Owl, there's fund-level leverage, and as the funds are refinancing from, call it, 3% and 4% debt up to plus 6%, 7% debt, the strategies just don't work anymore.

The cost of funding is too large. And so what we've seen is credit default swaps for the alts managers begin to widen, and that means there's less liquidity, and that means we're going to have to wind down some of this lending activity, and that then becomes self-reinforcing, and ultimately we're going to see some losses. The thing to really keep an eye on is, we had the Tricolor and First Brand bankruptcies in and around the auto parts supply chain. In the UK, over the last couple of weeks, we've seen a similar situation with MFS where they had double-pledging of collateral, and they were tipped into bankruptcy because of that. And then you had another entity, I think it was Century Capital, who was borrowing short-term from Blue Owl in order to provide bridge financing, and Blue Owl pulled that funding, tipping them into bankruptcy.

So a lot of these elements are linked. The double-pledging of collateral could be a bigger issue, and we could see it start to hit other players as we begin to audit some of these. Now, let's tie it back to something that may be a lot more opaque, which is to say, all of these alternative managers and private equities have captive insurers or relationships with captive insurers in Bermuda. There are easily over 100 insurance companies there. And that's where we're seeing a lot of the games being played where they're not marking the credits to market. They may be slicing and dicing those credits and effectively selling them to themselves, meaning you originate a loan, you sell it to an insurance company that you control. Those insurance companies may then repackage those and put them into CLOs and maybe leverage them 10 times.

And the numbers are large enough that if you just start losing the liquidity or you see rising defaults via software, enterprise software companies, or elsewhere, you're going to start to see problems develop in private credit. And these things are slow, and since they're slow, markets don't do as good a job of discounting them, and I think there could be some real issues there. And depending on how quick these losses are realised, I think they could be quite serious. So, we're talking about tens of billions of dollars, which may not sound a lot, but then you leverage them up, and you're talking about hundreds of billions of dollars. And this is the marginal financing that's been used for the M&A activity, and we already have all these illiquid LP positions that are looking for an exit, and unfortunately, they may be getting cut off from the credit markets as well.

And the way I would try to describe it is, I think we already are in a world of haves and have-nots, meaning companies that can still access credit can do so at attractive rates. Those that can't are going to get restructured. And so the refi wall that's in front of us over the next 24 years is only going to highlight the distinction between the haves and the have-nots.

Dan: All right, great, Chris. Well, this is a good one, so thank you for coming on. Appreciate the insight here, and we'll talk soon.

Chris: Sounds good.