Concerns of an AI bubble may be mounting, but at the Goldman Sachs Financial Services Conference on Wednesday, the biggest private investors were bullish on their own investments.
Blackstone President Jon Gray said it was the firm’s biggest moneymaker. Ares CEO Michael Arougheti said that the firm’s international data center investments are accelerating ahead of expectations and boosting revenue expectations. Blue Owl co-CEO Doug Ostrover said the firm is “incredibly bullish” on its own data center investments.
All signs point to a continued investment boon.
“If you subscribe to our worldview that bringing superintelligence at scale at very low cost is going to be transformative, you try to figure out — how can I invest in that and take the least amount of risk?” Gray said.
Apollo CEO Marc Rowan said that no matter where he is in the world, the world’s biggest users of “compute” (data center capacity) tell him they need more of it.
“When are they going to get more compute?” Rowan said. “No time soon, because there are natural limits and there are energy limits and there are regulatory limits and zoning and everything else.”
Ostrover said he has “never seen a market” with this level of supply-demand imbalance, and he sees “demand accelerating,” but he doesn’t “see the supply increasing.”
However, behind the excitement, the industry’s biggest investors are mulling over the risk they can’t capture right now — whether leases for these data centers will be renewed 15 to 20 years from now.
Rowan, looking at the present situation with his “credit hat” on, said, “The risk I’m prepared to take is lease-up risk,” Rowan said. “The risk I’m not prepared to take is renewal risk.”
Rowan said he has a chart on the wall of his office that compares different big consulting firms’ projections of energy usage in 2030, and the “spread is like a child throwing darts.”
“The experts in this have no idea on energy use, much less chip use, compute, the impact of quantum.” Rowan said. “Do I really want to, with my credit hat on, take renewal risk?”
The answer is no, and Rowan said there are plenty of ways for a credit investor to make money without taking renewal risk. In equity, you’re betting on renewals, with the possibility of massive upsides or the “chance of losing everything.”
“There will be both great fortunes made and lost in the equity of data centers,” Rowan said.
Lease quality
One way to make those bets a little safer is to vet who you’re betting on.
Blackstone, a major infrastructure investor, is only betting on “long-term lease data centers where you don’t put a shovel in the ground until you have a 15-plus year lease with a very large market cap company.”
Other potential bets include the power behind the AI revolution. It may be true that projections of power usage in 2030 are disparate, but they’re probably all up and to the right.
“I can’t come up with a scenario where we’re not using significantly more power five years from today,” said Gray.
One way to do it is to sign favorable leases with the best tenants. Blue Owl has a large “triple-net-lease” business, an industry term for commercial leases where taxes, insurance, and maintenance costs are paid by the tenant, instead of the landlord.
Usually, Ostrover said, these leases are to solid businesses like Walgreens or Cracker Barrel, with 3% annual increases over 15 to 20-year leases. They’re investment-grade tenants, around BBB credit, and have generated “in excess of 20% return in that product.”
Now, they get those same terms with A or AA-credit tenants.
“So now, we’re faced with an opportunity where instead of working with Walgreens, Cracker Barrel, firms like that, we can go to Microsoft, Meta, Google, Apple, the biggest companies in the world, signing identical 20-year leases,” Ostrover said.
That way, even if they can’t renew a lease, they’re making their money.
“The way we look at it to our downside is even if the facilities are worth zero at the end of their lives, we can still make a teens return,” Ostrover said.
A Blue Owl spokesperson told BI that the firm’s “expectation” is that there’ll be “meaningful residual value” at the end of a lease.
