The massive capital expenditure for AI infrastructure will not primarily come from traditional unsecured corporate credit. Instead, a specialized form of private credit known as asset-based finance (ABF) is expected to provide over $800 billion of the required $1.5 trillion in external funding.

The huge capital needs for AI are creating a battleground between banks and private credit firms. Blue Owl's $27B financing for Meta's data center, which paid Meta a $3B upfront fee, shows how alternative asset managers are using aggressive debt structures to win deals and challenge incumbents like JP Morgan.

Unlike the asset-light software era dominated by venture equity, the current AI and defense tech cycle is asset-heavy, requiring massive capital for hardware and infrastructure. This fundamental shift makes private credit a necessary financing tool for growth companies, forcing a mental model change away from Silicon Valley's traditional debt aversion.

Private credit has become a key enabler of the AI boom, with firms like Blue Owl financing tens of billions in data center construction for giants like Meta and Oracle. This structure allows hyperscalers to expand off-balance-sheet, effectively transferring the immense capital risk of the AI build-out from Silicon Valley tech companies to the broader Wall Street financial system.

A major segment of private credit isn't for LBOs, but large-scale financing for investment-grade companies against hard assets like data centers, pipelines, and aircraft. These customized, multi-billion dollar deals are often too complex or bespoke for public bond markets, creating a niche for direct lenders.

Unlike private equity (terminal value) or syndicated loans (interest-only), asset-based finance (ABF) provides front-loaded cash flows of both principal and interest. This structure inherently de-risks the investment over time, often returning significant capital before a potential default occurs.

The financing for the next stage of AI development, particularly for data centers, will shift towards public and private credit markets. This includes unsecured, structured, and securitized debt, marking a crucial role for fixed income in enabling technological growth.

To finance its capital-intensive AI cloud build-out for customers like OpenAI, Oracle may create the first public "chip-backed asset-backed security" (ABS). This novel financial instrument would let Oracle raise money against its existing GPUs in public markets, lowering costs and potentially keeping debt off its balance sheet via a special-purpose vehicle.

Private credit is a major funding source for the AI buildout, particularly for data centers. Lenders are attracted to long-term, 'take-or-pay' contracts with high-quality tech companies (hyperscalers), viewing these as safe, investment-grade assets that offer a significant spread over public bonds.