(Bloomberg) -- The artificial intelligence boom is driving business to private credit firms, as tech companies seek funding to build data centers filled with computing chips to operate AI models.
Carlyle Group Inc. expects more than $1.8 trillion of capital will be deployed by 2030 to meet that demand, and a chunk of that can be taken up by the private markets, Chief Executive Officer Harvey Schwartz recently wrote in a shareholder letter.
"There's a need for private credit to facilitate the infrastructure build for AI, whether it's chips or data center developments," Mark Van Zandt, managing director and co-head of real estate at King Street Capital Management, said in an interview.
Public-market products like asset-backed bonds or traditional real estate debt, have funded data center projects, but these "can't do it all," he added.
A slew of tech companies have already tapped private capital — both private equity and debt — to help build the physical infrastructure needed to support AI.
Startup Nscale is looking for $2.7 billion, including a $1.8 billion private credit loan, on the back of a pending ByteDance Ltd partnership. SoftBank Group Corp. has sought a $16.5 billion loan to fund such investments in the US. Meta Platforms Inc. is looking to raise billions in financing to develop data centers domestically, with Apollo Global Management Inc and KKR & Co. as potential investors.
Private lenders have been searching for avenues outside of traditional corporate lending for growth and tap into areas of credit that can come with higher ratings. Financing AI infrastructure is one of those paths, according to market participants.
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Apollo, for example, has been beefing up its infrastructure-related talent. The firm recently hired Abhishek Sharma, most recently head of energy strategy for Amazon.com Inc.'s AWS division, as a managing director within high-grade capital solutions.
Ares Management Corp. has estimated private investors could fund about $5.5 trillion of capital across debt and equity in global infrastructure, including AI-focused projects, through 2035, according to a report this year.
Cloud computing firms, and tech companies generally looking to develop AI programs, need an immense amount of capital. That can come in the form of investment-grade loans backed by microchips or data center leases with contracts tied to companies with top-tier credit scores.
"The capital needs are enormous," Van Zandt said. "There's a demand-supply imbalance in the market that will take some time to get resolved."
Wall Street banks also want to be involved in these types of deals, and some are asking private capital funds to partner up. Morgan Stanley, for instance, has held talks with private credit firms to understand how they could team up on AI deals.
Still, some asset managers, including Diameter Capital Partners, are skeptical of just how much money is flowing into AI developments and are ready to pounce on any financial fallout. Capital markets firm Seaport Global Securities also recently warned that the benefit of AI has been "priced in for now," adding budgets dedicated to the sector are likely to slow next year.
"AI is now at the early stage where resources are scarce and money is flowing to almost all opportunities with little regard for long-term prospects," Diameter co-founders, Scott Goodwin and Jonathan Lewinsohn, wrote in a letter earlier this year.
Deals
- Private credit lenders are in talks to provide about $1 billion of debt to support a potential take-private of Swedish financial services firm Fortnox AB
- Ares has begun reaching out to other lenders to participate in a $5.5 billion financing to support Clearlake Capital Group's buyout of Dun & Bradstreet Holdings Inc. in what would be one of the largest private credit deals ever arranged
- Apollo and other investors have bought the first known bonds that offload risk from bank loans extended to private credit funds known as business development companies
- KKR Capital Markets has fully underwritten a $250 million-equivalent debt financing backing KKR & Co.'s offer for Biotage AB
- Hillhouse Investment's China logistics platform Gaolu Group is seeking $100 million in private credit to fund acquisitions of assets
- Private credit lenders including Intermediate Capital Group Plc, Goldman Sachs Asset Management and the direct-lending unit of JPMorgan Chase & Co. are among firms in early-stage talks to provide roughly €1.6 billion to refinance the debt of Belgian drugmaker SERB Pharmaceuticals.
- Goldman Sachs' private credit fund tapped the US high-grade bond market Tuesday
Fundraising
- Apera Asset Management, a direct lender for lower middle market companies in Europe, has raised €2.9 billion for its latest fund
- Mubadala Investment Company, an Abu Dhabi sovereign wealth fund, agreed to invest $1 billion in private credit and other strategies managed by Fortress Investment Group
Job Moves
- Apollo partner and co-head of hybrid value Robert Ruberton is leaving the firm after a 21-year tenure
- Neuberger Berman Group expanded its specialty-finance team with two new hires from Pacific Investment Management Co. and Blackstone Inc.
- Balbec Capital LP has named Peter Troisi as its chief executive officer, replacing founder Charles Rusbasan
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--With assistance from Rene Ismail.
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