Iran, and the inception of ideas

The events in the Middle East dominated the headlines in June, culminating in America’s surprise assault on Iran’s nuclear facilities. Fears of escalation, American forces being dragged in, the closing of the Strait of Hormuz and a spike in oil prices, appear to have been avoided. It is impossible to predict developments, but some observers note that Israeli strikes focused on the leadership of the Iranian Revolutionary Guard Corps (Sepah), possibly influencing the succession process for supreme leader, Ali Khamenei, who is 86 years old.

This analyst visited Iran a decade ago, when the US was finalizing the Joint Comprehensive Plan of Action (JCPOA) nuclear deal, in order to assess investment opportunities in listed Iranian companies. This included meetings with the Tehran Stock Exchange, several publicly traded firms, brokerage houses, a leading telecom, and Iran’s sanctioned central bank – one of the two most fascinating meetings in this analyst’s career (the other being with senior leaders of South Africa’s Economic Freedom Fighters, but that’s a story for another day).

As it turned out ongoing sanctions applied to US firms, including the firm where this analyst worked, preventing us from investing.

But Iran left an impression. It is a sophisticated, industrialized and highly educated nation that boasts tremendous cultural and civilizational depth. The hospitality was warm and the people we met were remarkable, bearing little ill will towards the US or the West, although they hoped for better economic opportunities. There were a number of interesting listed industrial and consumer-focused businesses (trading at very attractive prices), although working out who controlled them posed a challenge, with IRGC interests across vast swaths of the economy.

Iranian hero, Rustam and his horse, Raksh

The reason for this small diversion is two-fold. Our visit to Iran was the genesis of an idea that later became a successful investment at Phronimos. At the time of our visit Iran Khodro was Iran’s leading auto manufacturer, producing Peugeot vehicles under license and it was hoped the lifting of sanctions would allow Peugeot to invest and grow production. It was in 2015 we first learned of Peugeot’s improving fortunes under then CEO, Carlos Tavares.

Four years later, Phronimos invested in Peugeot during its merger with Fiat Chrysler to form Stellantis, a leading global automaker with Carlos Tavares at the helm. The merger was supported by the major shareholders in Fiat, the Agnelli family, via their investment holding company Exor. We sold our Stellantis shares earlier last year for a substantial profit, but we remain invested in Exor, under the stewardship of John Elkann who is a keen student of Buffet and Munger as he looks to grow Exor into a diversified stable of great businesses. We enjoy being aligned with the Agnelli family under Elkann’s leadership.

The lesson of this short diversion into Iran, Peugeot, Stellantis and Exor, is that ideas can emerge from the most unusual of places. Being observant, reading widely, connecting pieces of seemingly unrelated information, and compounding knowledge over time, are some of the great joys of investing.

The other reason for this sojourn is that we hope for a reconciliation between Iran and the US, and note reports of ongoing contact between US special envoy, Steven Witkoff, and Iran’s foreign minister. A US-Iran rapprochement would bring greater stability to the Middle East, allow Iran to achieve its incredible potential, and open up terrific economic opportunities. Iran has the third largest oil reserves in the world, according to the US EIA, and yet was producing only around 4.5mm b/d of liquids in mid 2024. Its natural gas reserves are second only to Russia. But it is Iran's vast reserves of high-quality human capital that are really the most compelling reason to hope for better relations.

Also, we would love to return one day, certainly as visitors, but perhaps one day as investors as well.