Why a Goldman Sachs executive said the Iran war is distracting investors

Kunal Shah, co-chief executive of Goldman Sachs International (Courtesy: goldmansachs)

A senior Goldman Sachs executive told clients that some investors in private markets are quietly relieved that the war with Iran has taken attention away from a different worry: the growing risks inside the private credit and technology lending sectors.

Kunal Shah, co-chief executive of Goldman Sachs International and global co-head of fixed income, currencies and commodities, made the comments during a call with clients discussing the geopolitical situation and its impact on markets, the Financial Times reported.

According to people familiar with the conversation, Shah said some of the bank’s private markets clients were “just glad there’s something to talk about that isn’t software exposures and private credit.”

Why private markets are under scrutiny

Private credit and private equity firms have faced increasing questions in recent months about their exposure to technology companies, particularly enterprise software firms.

For years, private lenders have poured money into the tech sector, offering loans to companies that might previously have relied on traditional bank financing. Many of those companies operate in fast-growing but uncertain areas of the technology industry.

Now investors are becoming more cautious. The rapid development of artificial intelligence has raised questions about whether some existing software businesses could be disrupted, which in turn could affect their ability to repay debt.

Because private credit funds often hold large amounts of this type of corporate loan, concerns about the sector have begun to ripple through financial markets.

Why investors are nervous about private credit

The private credit industry has expanded dramatically over the past decade as banks pulled back from certain types of corporate lending after the global financial crisis.

Large asset managers such as Blackstone and Apollo Global Management built major businesses lending directly to companies. Instead of raising money through public bond markets, firms increasingly borrowed from private funds.

But the rapid growth of the industry has also raised concerns about underwriting standards and risk levels.

Those worries intensified after two high-profile corporate bankruptcies last year — Tricolor Holdings and First Brands Group — which involved allegations of fraud. The collapses unsettled parts of the corporate credit market.

JPMorgan Chase chief executive Jamie Dimon warned at the time that other hidden problems might still exist, suggesting that more “cockroaches” could emerge in credit markets.

How the Iran war changed the conversation

Against that backdrop, the conflict with Iran has injected fresh volatility into global financial markets.

Oil prices, bond markets and stock indices have swung sharply as investors react to developments in the Middle East. Some hedge funds have already suffered losses due to sudden price movements in energy and currency markets.

According to people familiar with the Goldman call, Shah’s comment reflected how the geopolitical crisis has temporarily shifted investors’ focus away from structural concerns about private markets.

For some clients, the war has simply become the dominant topic in financial discussions.

What Goldman Sachs is telling clients

Goldman has been advising investors on how to navigate the uncertainty created by both geopolitical tensions and shifts within financial markets.

The bank has reportedly presented hedge funds with strategies that allow them to bet against certain corporate loans, particularly those linked to enterprise software companies that could be vulnerable to disruption from artificial intelligence.

Such trades would allow investors to profit if those loans decline in value.

The client call where Shah made his remarks also included commentary from Goldman’s energy trading teams and from Sir Alex Younger, the former head of Britain’s Secret Intelligence Service, who now advises the bank.

How investors are reacting to the current market turmoil

Despite the volatility, Shah suggested that many investors remain accustomed to navigating turbulent periods.

According to people familiar with the discussion, he noted that some of Goldman’s clients had experienced similar episodes of geopolitical uncertainty in the past and were relatively resilient.

However, he also said that investors based in the Middle East were finding the current environment particularly difficult as the risks associated with the conflict remain intense.

For financial markets, the episode highlights how quickly attention can shift from one set of risks to another.

Even as investors worry about the consequences of war in the Middle East, the underlying concerns about private credit, technology lending and corporate debt markets have not disappeared. They have simply been pushed temporarily into the background.