Iran Escalation and Private Credit's Reality Check

The escalation of the conflict in the Middle East over the weekend has injected a fresh wave of volatility into global markets, pushing up oil, gas and gold prices and sending global stocks sliding.

The situation remains highly fluid, and any definitive views and forecasts would hold us hostage to ongoing events. What we can identify for now are some of the key variables that may determine market pricing in the coming days. The anxiety surrounding oil and gas reflects their potential to act as a tax on global growth.

Realistically any impact depends entirely on the duration of the conflict, the extent of infrastructure damage and the risk to the closure of the Strait of Hormuz.

The infrastructure risk

The duration of the oil/gas price spike hinges primarily on physical damage. So far, the counter-attacks do not appear to have targeted energy infrastructure widely.

This distinction is vital. If we see extensive damage to production facilities or refineries, some bullish forecasts are calling for more than US$100 per barrel. If infrastructure remains intact, history suggests the geopolitical risk premium will fade relatively quickly once the initial shock passes.

There is a logic to the restraint we have seen so far. The Iranian economy is highly reliant on oil exports. Targeting energy infrastructure would effectively be an act of economic self-harm. Unless the leadership feels they are facing an immediate existential threat, they are unlikely to destroy the revenue stream they need to survive.

There is also a regional nuance here. The Khuzestan region holds many of the key oil fields. The population there has historically been anti-regime and there are reports of local unrest. We think this internal dynamic might limit the willingness or ability of the regime to engage in "scorched earth" tactics on its own economic lifeline.

The Strait of Hormuz and the insurance key

Much of the immediate anxiety surrounds the Strait of Hormuz. This narrow passage is responsible for roughly 20% of global oil flow and 20% of global liquefied natural gas (LNG).

Iran has threatened to close the Strait. Whether they actually do so might be irrelevant. Commercial shippers are already avoiding the passage. The real friction point here is insurance rather than a naval blockade.

Western insurers will likely refuse coverage for vessels transiting the Strait. If ships cannot be insured they will not sail. This effectively closes the passage to a large portion of the global fleet regardless of the political rhetoric.

OPEC has responded by saying it will increase output by nearly 206,000 barrels per day. This is also largely symbolic. The problem is not the level of production but the ability to get that oil to market. There are limited pipelines in Saudi Arabia and Abu Dhabi that can reroute flows but they can only handle about 10% to 15% of the volume that usually goes through the Strait.

The China buffer

Oil prices have surged but the move is perhaps less violent than one might expect given the severity of the headlines. One reason for this is inventory.

The US buys very little oil from this specific region. The biggest buyer of Iranian oil is China. Supply data suggests China has been stockpiling aggressively throughout 2025. The country is estimated to be sitting on over one billion barrels of oil which offers it four to five months of demand cover. This inventory buffer acts as a significant dampener on the immediate price shock.

The delayed reaction in gas

A curious feature of the early market reaction was the lag in natural gas prices. The Strait of Hormuz is just as critical for global LNG as it is for oil, yet gas prices did not react with the same immediacy. This is likely a result of unseasonably warm weather reducing demand as we near the end of the heating season.

However, we are now seeing gas prices catch up. If the disruption persists into the season where countries need to build inventory for next winter, the tightness in the global LNG market could become a serious issue.

We are also watching supply chains for methanol and nitrogen fertiliser. Iran is a significant producer of both (with the Strait of Hormuz transiting 30-35% of global traded urea). While we do not anticipate immediate global shortages, prices in these sectors have already started to climb.

The gold angle

For now, gold continues to act as the primary hedge against this fragmentation, responding to the volatility even as the US dollar remains rangebound. Unlike oil, which is tethered to the physical constraints of shipping and transit, gold is pricing in the broader risk of a rapidly evolving multi-polar world.

Parting thoughts

Analysing markets during the early hours of a conflict is inherently fraught, not least because of the human toll involved. Also, the picture on the ground changes faster than the data can update.

Based on what we can see today, the interplay between infrastructure damage, oil transit through strategic chokepoints, and regime stability will determine whether this is a momentary price spike or a sustained supply shock.

All data sourced from Bloomberg unless otherwise stated. 

Author: Albert Chu, a Portfolio Manager, Natural Resources, at Man Group.

The Blue Owl signal: private credit's reality check

Blue Owl is the third big private credit blow-up in six months. Each time, some media push the ‘is this the death of private credit?’ narrative. First and foremost, and, perhaps not surprisingly coming from us, we do not believe that the fundamentals of private credit are cracking. But it is fair to say that we are going through something of a reset.

The software fault line

At the heart of the current pressure is a concentration in software. Private equity has become a major owner of software companies over the past decade, with private credit and broadly syndicated loan (BSL) lenders providing the leverage. Valuations and spreads in software credit became overly optimistic, a large amount of capital flowed into finance these companies, and now AI-driven disruption has forced a re-evaluation.

While there’s a likely rise in selective default rates, there is a strong case that this represents a reversion to historical levels coming out of a prolonged low-default environment, rather than a secular shift. What we are seeing is a reset back to a more normalised spread environment.

That said, private credit is not a homogenous asset class, and strategies vary wildly across the US$1.5 trillion industry. We need to distinguish between direct lending, business development companies (BDCs), opportunistic, and asset-based lending (ABL) strategies to understand who actually holds the software exposure and who has the most to lose from downward revisions to free cash flow.

The redemption myth

For many investors, Blue Owl has revived uncomfortable echoes of the Great Financial Crisis. But the comparison requires careful examination.

The media has generally portrayed Blue Owl as having gated investors and refused redemptions. In reality, the terms of these vehicles do not allow for immediate redemptions. Private credit loans are originated with the express purpose of being held to maturity so this lack of tradability is a feature of the asset class, not a flaw.

It is more appropriate to think of these structures as a closed gate that is only opened periodically for a limited amount at the discretion of the board, rather than an open gate that gets "put up" in challenging times. The media narrative inverts the actual structure.

There is effectively no private credit held in 'runnable' vehicles in the traditional banking sense.

However, the growth of permanently private BDCs has been driven largely by retail and wealth channels, where investors may not have fully appreciated the limited liquidity on offer. If retail inflows slow and outflows pick up, particularly for managers most exposed to AI risks or whose capital bases have a significant retail component, this will be an additional headwind for the industry to contend with. Over time, the market should better appreciate the risks and nuances of these vehicles and their appropriateness in retail portfolios.

What about private equity?

Another key question for the broader industry is whether this represents a cyclical correction or the end of the 17-year private equity (PE) / private credit boom?

If software companies face a broad revaluation, PE stands to lose more than private credit. Software investments accounted for roughly 25% of all PE deal activity between 2018 and 2025,[1] creating a significant concentration risk for sponsors.

What is clear is that the reset is already underway. Spreads are widening and leverage is coming down. For disciplined investors, the dislocation in software may ultimately present opportunities as businesses that were previously financed at compressed spreads begin to trade at more attractive levels.

The bottom line

The reset to a more normalised spread environment is well underway.

But data emerges every day about which companies are most vulnerable to AI displacing traditional software as a service (SaaS) business models. The latest AI models are unrecognisable from those released only months ago. “Finger in the air” projections in the headlines driving panic amongst market participants may be as useless as the Yellow Pages. For allocators, we believe the practical question is no longer whether to own private credit, but whether they understand what it is inside.

All data sourced from Bloomberg unless otherwise stated.

Author: Andrew Weymann, Director, Client Portfolio Manager, US Private Credit at Man Group and Zeshan Ashfaque, Senior Managing Director and a Senior Credit Officer, US Direct Lending, at Man Group.