PYMNTS MonitorEdge May 2024

Wall Street Providing Financing Deals Backed by AI Chips

Nvidia

Wall Street investment firms are taking advantage of the booming artificial intelligence (AI) industry by providing financing deals backed by AI chips.

Graphics-processing-unit (GPU) chips are essential for the development and deployment of advanced AI models, The Wall Street Journal (WSJ) reported Tuesday (May 21).

A recent surge in private-debt financing deals, such as CoreWeaves $7.5 billion deal led by Blackstone, highlights the growing importance of AI in the financial sector, according to the report.

CoreWeave, a New Jersey-based startup specializing in AI chips and computing gear, secured its $7.5 billion in private debt financing to support its global expansion in data centers and enable the purchase of more chips from Nvidia, the leading supplier of computational power for the AI industry, the report said.

CoreWeave is not alone in leveraging its AI chip inventory for borrowing purposes, per the report. Several similar deals have closed, raising over $10 billion for companies that offer AI computation services. This trend reflects the rapid growth of startups in this sector and the eagerness of credit investors to gain exposure to the AI industry.

However, these financing deals come with higher interest rates, reflecting the risk associated with relatively unproven companies and untested collateral, according to the report.

The higher interest rates on these chip-backed loans reflect the fast-paced nature of the AI industry, where demand for services outpaces revenue and profit generation. However, as these companies mature financially and demonstrate their potential, they may transition to more traditional funding sources.

The success of these financing deals ultimately depends on the strength of the AI boom, per the report. Demand for AI chips continues to surge, although companies are still working on generating significant revenue from AI applications. Nvidia’s upcoming earnings report will provide further insights into the industry’s growth trajectory.

Blackstone’s involvement in the CoreWeave financing deal showcases its strategic focus on capitalizing on the AI boom, according to the report. The private equity firm has already made substantial investments in data centers, recognizing their importance in supporting AI infrastructure.

As investors become more comfortable with these innovative financing structures, borrowing costs may decrease, leading to further deals in the future, the report said.

Activity in this space is already picking up, with Lambda Labs raising $500 million in a deal backed by Nvidia’s chips, and Applied Digital closing in on a financing deal worth hundreds of millions of dollars, per the report. The growing interest in these deals reflects the increasing recognition of the value and potential of AI chips as assets.

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