Can We Sell Equity Financing of the DataCenter Build-Out at a Debt Price?: FINANCIAL OVEREXUBERANCE OF THE DAY
Apollo, BlackRock, Blackstone, Brookfield, Goldman, & KKR are about to go all-in taking on equity risk and calling it high-quality debt, apparently in the belief that the money flow to them from the deals is a very large bird in the hand, and that they will find a way to fix it later, if it does indeed need fixing later. Or: private equity now thinks that it is too big to fail, and we know how entities confident that they are too big to fail that are unregulated roll, don’t we?
Last year Jensen Huang said: You need to buy the latest and greatest chips my team has designed right now because the chips we designed that you bought last year are obsolete and effectively worthless. This year, Jensen Huang is saying: You need to lend huge amounts of money with the chips my team designed in the past as security because they are durable income-producing assets with a ten-year economic life.
I see it is once again time to talk financial innovation. Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR are all working with Nvidia to put together $500 billion in financing to turn compute into an asset class. “This is really the first time that technology chips have become an investable asset class,” Nvidia CEO Jensen Huang said to CNBC. “These are revenue-generating assets now. They’re productive, they’re long-lived, they’re fungible, they’re flexible.” Huang said something very different about Nvidia’s own last-generation Hopper chips last year. “When Blackwell starts shipping in volume, you couldn’t give Hoppers away…. There are circumstances where Hopper is fine. Not many.” So to now be told that chips are actually “revenue-generating assets” that are “long-lived” is… quite frankly, it’s giving me whiplash…. “This is the very beginning, like what it was when I started in the mortgage-backed securities market in the 1970s, and I look upon this as a next future for financial engineering,” said Larry Fink…. Now, for some of you, this may make alarm bells go off…. The AI industry is becoming saturated with data centers, and Chinese open-source models require less compute despite being fairly powerful, both of which seem like potential threats to the notion of ever-growing demand for chips. There is also a far more basic question: Can frontier labs such as Anthropic and OpenAI, which are driving much of the current demand, make money?…
As I keep pointing out to no avail: The gatekeeping question is “Will Amazon, Google, FaceBook, Microsoft, and so on allow Anthropic and OpenAI and anyone else hoping to make a profitable business out of selling LLM-services to make money?” And the likely answer is that they will fight Anthropic and OpenAI tooth-and-nail just as Microsoft made it certain that Netscape would never make money by giving away for free anything and everything that Netscape was trying to sell.
I do not see how you pass that gatekeeping question. If you do pass that gatekeeping question, somehow, then there are more questions:
What does the world look like in scenarios in which the chip purchasers you, Ms. Private Equity, have financed do not make their amortization payments?
What does the cash flow from the datacenters and the chips in them that you then have to take over look like in those worlds?
How do you then explain to your investors whom you promised megaalpha that your major assets are underwater utilities?
I see no scenario in which the fact that the debt is secured is worth anything.
That is, I see compute is now an asset class as let us see if you are foolish enough to make equity investments at a debt-investment price if we simply tell you that it is not equity but debt.
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