It's Not Just About Debt: Blackstone CEO Calls for Creativity in Raising Capital for AI

The rapid growth in spending on artificial intelligence infrastructure requires a shift in the capital structure toward equity financing rather than debt financing, said John Gray, president of the investment firm Blackstone.

"This sector will need more equity capital to keep up with the enormous demand," he said Tuesday at the Global Investment Summit for Financial Leaders (as quoted by CNBC).

According to Gray, the concentration of creditors among a limited number of companies in the industry increases the risks. Furthermore, unlike shareholders, who reap the benefits of a company’s growth, creditors’ earning potential is limited to interest payments and principal repayment, added the head of Blackstone.

According to Goldman Sachs, global capital expenditure needs for data centers over the next five years will total $8.5 trillion. Financing the construction will require a combination of public markets, banks, and private capital, according to the head of Blackstone. “We need to be resourceful because the scale of the capital required is enormous,” he said.

At the same time, Gray remains optimistic about AI infrastructure: demand for computing power, he says, “far outpaces supply.” Spending on AI models at Blackstone’s portfolio companies has increased 20-fold over the past year, driven by the financial returns from applying the technology to programming, customer engagement, and content creation, he noted. At the same time, meeting demand remains challenging: it is becoming increasingly difficult to find facilities, obtain permits, secure chips, power, and capital, Gray added.

During the same panel discussion, Pimco CEO Emmanuel Roman warned investors that the scale of AI funding could prove to be “too large” for the market. Capital expenditures on AI could reach around $10 trillion over the next five years, Roman said, citing an estimate by General Atlantic CEO Bill Ford. Since the beginning of the year, approximately $550 billion in AI debt has already been issued in various forms, he added.

Even with a combination of equity and debt financing, the amount required would be “enormous”—by way of comparison, the entire global corporate bond market is valued at approximately $20 trillion, noted the head of Pimco, one of the world’s largest investors in the bond market. “At some point, it will become too much,” Roman said.

The warning came amid growing concerns in the credit markets. In October, shares of cloud infrastructure provider CoreWeave plummeted by more than 25% in a single week, and yields on its bonds rose above 15%, triggering a sell-off across the entire sector. Max Frums, head of distressed and high-yield debt at 9fin, told Reuters that he considers the CoreWeave case a “canary in the coal mine”—that is, an early warning sign for the entire market segment.

Jeffrey Gundlach, founder of DoubleLine Capital, had previously expressed concerns about the sector’s high debt levels: in September, he reduced the equity allocation in his portfolio from 40% to 30%, to reduce concentration in AI names, and pointed to widening credit spreads on AI companies’ debt amid “insatiable demand” for borrowed funds.

This article was AI-translated and verified by a human editor