At a dinner hosted by some of Morgan Stanley’s top bankers in New York last month, one topic dominated the table talk: the fortunes to be made from the frenzy around artificial intelligence.
In the room were many of the marquee names of private capital. Apollo Global Management Inc., Ares Management Corp., Blackstone Inc., HPS Investment Partners, KKR & Co. and Oaktree Capital were all invited, the very same firms who’ve recently emerged as a serious threat to Wall Street banks’ long reign over the lucrative world of corporate finance.
But
on the night in question Morgan Stanley was preaching unity, according
to people who attended. So massive is the demand for investment dollars
to build the scaffolding for the latest digital revolution, it argued,
that there’s no need to compete over who gets to do the lending. Bankers
and private financiers should instead be ready to combine their forces —
and their firepower.
While much of the speculative hype around AI has played out in the stock market so far, as seen in chipmaker Nvidia Corp.’s share price, the giddiness is spreading to the sober suits of debt finance and private equity.
Analysis
by Bloomberg News estimates at least $1 trillion of spending is needed
for the data centers, electricity supplies and communications networks
that will power the attempt to deliver on AI’s promise to transform
everything from medicine to customer service. Others reckon the total
cost could be double that.
Even Wall Street skeptics on AI’s ultimate money-making potential, such as Goldman Sachs Group Inc.’s head of equity research Jim Covello, have said it’s worth staying invested in those who provide the plumbing.
The wealth of Silicon Valley’s and Seattle’s tech giants, who want some
of this capacity anyway for cloud storage and the like, offers a degree
of comfort.
Banks are racing to keep up with the burst of activity. JPMorgan Chase & Co. has set up a dedicated infrastructure team to corral its troops, according to a person with knowledge of the matter, as has Deutsche Bank AG
and others. One rival banker admits his firm is juggling so many
data-center deals that it doesn’t have enough staff to cope with the
workload.
It’s
the same for debt funding. At its dinner, Morgan Stanley said banks
don’t have the balance-sheet heft to satisfy the thirst for credit,
hence its pitch to partner up with private capital: There’s room at this
feast for everyone.
For
investment bankers, the opportunity arrives just as many were hunting
their next meal ticket. Providing debt financing to companies has long
been a crucial Wall Street profit engine, but the business has been
through a rough patch of late. While public equity markets have been
going gangbusters over the past couple of years, supercharged by AI
mania, returns on investment-grade credit have been anemic.
Leveraged-finance teams, who fund riskier private equity buyouts, have
suffered as M&A dried up.
“The view is very bullish,” says Dominik Thumfart,
Deutsche Bank’s head of EMEA infrastructure and energy origination.
“This market will remain a major growth area on the financing side for
several years to come. The investing curve is very upward looking.” The
German lender has worked on $17 billion of data-center financings over
three years.
It’s
not just the funding of mammoth new data centers coming to the rescue.
Two of corporate finance’s dustiest corners have been shaken into life
by the tech industry’s hunger for processing power: Utilities and telecommunications are suddenly among the hottest credit markets around.
For private-market behemoths like Apollo and KKR, digital infrastructure
is also a chance to turn the page on a tough period when higher
interest rates upended the economics of deals struck in the cheap-money
era. Firms including Blackstone, Brookfield Infrastructure Partners and Stonepeak Partners have been gobbling up data centers and laying the groundwork to build them, too.
BlackRock Inc.’s boss Larry Fink told Bloomberg TV his firm will raise as much as $120 billion in debt linked to data centers, after teaming up with Microsoft Corp.
to bankroll the development of the buildings and energy infrastructure.
Bankers and private lenders will be desperate for a slice of such
deals.
Nonetheless,
even amid the AI delirium there are notes of caution. Some point out
that while private equity firms have a solid pedigree in real estate,
they haven’t done construction work at the epic scale and expense of
some of these data centers — known as “AI factories” in the lingo of Nvidia’s founder and chief executive officer, Jensen Huang. Innovation is constantly upending technology, adding jeopardy to long-term capital projects.
And
AI’s acolytes still haven’t dreamed up a “killer app” to match the
wildly successful e-commerce and GPS location-based upstarts of the Web
2.0 era. Even if they do, the tech industry’s brightest minds are
working to make the software and hardware more efficient, to lessen the need for scale and power.
“There’s a lot of a reason for optimism,” says Barclays Plc’s Benjamin Fernandez,
head of the bank’s esoterics ABS business, which works on bonds backed
by “non-traditional” assets such as data centers. “But if for whatever
reason it doesn’t take hold and people don’t find a way to monetize this
investment in AI, that could potentially pose risk.”
Hyperactive
In a nod to the sheer size of their ambitions to manage, process and manipulate ever vaster magnitudes of data — and to the mountains of cash on their books — tech companies including Amazon.Com Inc., Microsoft, Alphabet Inc.’s Google, Meta Platforms and Apple Inc. have become known as “hyperscalers.” Their spending matches the grandiose language.Hyperscalers lavished $52.9 billion on AI infrastructure in just three months, Craig Scroggie, CEO of Australian data-center group NEXTDC Ltd, said in October.
Further proof of the “unsatiable demand” for computing horsepower, according to real-estate broker Jones Lang LaSalle Inc.,
is the more than sevenfold increase over two years in construction work
on US co-location centers, which lease out rack space to tech firms.
Asking rents in those facilities have jumped as much as 37% in 12
months, the firm estimated in an August report.
All
of this unbridled spending is revving up the issuance of both
investment-grade debt and riskier leveraged loans, especially in the US,
handily for private lenders and fee-starved investment bankers alike.
Hedge funds are looking as well to profit from AI hysteria with novel
types of debt structures.
It’s
also opened up a new corner of the asset-backed securities market,
where sales of debt backed by data centers have already jumped to a
near-record $7.1 billion this year, according to data compiled by
Bloomberg News. Chuck in fiber networks and other bits of kit, and it’ll
be much higher. Matt Bissonette, who heads Guggenheim Securities’ business in this area, says the number of buyers for his data-center ABS products has roughly doubled in four years....
