Blackstone's Jas Khaira Says AI-Buildout Debt Fears Are Overblown

Blackstone is writing checks through strategies that range from large loans to data centers to investments in frontier AI models and applications. Earlier this year, the firm launched Blackstone N1 (BXN1), a San Francisco-based hub for its AI initiatives. The group is led by Khaira, who moved from New York to be closer to the center of AI activity.

Khaira said the transition to AI requires far more capital than earlier technology cycles such as mobile and SaaS, which could reach significant scale with moderate capital. That need, he said, is why Blackstone can play a critical role in the shift. He said Blackstone differs from traditional venture capitalists through its focus on compute financing and its ability to offer flexible capital structures spanning debt and equity.

'We're the largest owner of compute outside of the hyperscalers today, whether it's investments in neo clouds, investments in data centers, and being able to use that compute strategically to support companies,' Khaira said, according to TechCrunch.

BXN1 played a role in several compute-related deals, including Crux AI, a neocloud launched in partnership with Google to commercialize its custom TPUs, to which Blackstone committed $5 billion as an investor. It also backed Etched, a four-year-old chip startup. Neoclouds are cloud providers that rent out AI GPU infrastructure.

Blackstone pioneered a financing structure that allowed it to lend large sums to venture-backed neoclouds by analyzing committed customer contracts and using GPUs pledged as collateral. Its first such deal came in 2023 with CoreWeave, shortly after demand for the neocloud exploded following the launch of ChatGPT. According to Khaira, CoreWeave had only '30 million of revenue and minimal profitability' at the time and approached Blackstone for a $2.3 billion loan.

CoreWeave borrowed against the value of its large collection of Nvidia GPUs, with Nvidia also an investor. Blackstone grew more comfortable with the loan because CoreWeave had contracts with blue-chip customers such as Microsoft. The transaction quickly became the financing model for how Blackstone and other credit institutions provided billions in follow-on debt to CoreWeave and rival neoclouds.

'One of the primary things that we're looking to is the nature of the customer. And if the customer is an investment-grade customer — let's say it's Microsoft or let's say it's Meta — the risk gets priced relative to that customer,' Khaira said. Building on the CoreWeave deal, Blackstone struck other neocloud financing agreements, including co-leading alongside Coatue a $10 billion credit facility for Australian GPU provider Firmus earlier this year.

Khaira acknowledged that in recent weeks, the large debt burdens accumulated by these companies and other neocloud operators have begun to raise red flags. CoreWeave's debt alone has since ballooned to about $50 billion, causing Altimeter Capital founder Brad Gerstner to note in a recent CNBC interview, 'The collateral that CoreWeave is putting up which is really only GPUs is not good enough anymore. They used that in the past to get cheap debt.'

Khaira said market jitters on the credit side stem from a combination of factors. Interest rates ticked up in September, and hotter-than-expected inflation signals that borrowing costs may keep climbing. The flood of AI infrastructure debt offerings is also weighing on the market.

'We're also seeing higher credit spreads,' Khaira said, explaining that lenders are charging higher premiums on top of already higher base interest rates to finance the AI buildout. 'The cost of capital to price in debt for a Meta or a Microsoft has widened out,' he added, pointing out that even tech giants with massive balance sheets and solid earnings are paying more to borrow.

Concerns about the rising cost of debt have spilled into the stock market. Shares of CoreWeave dropped over 20% in recent days, while Firmus scrapped its planned IPO on the Australian Securities Exchange at a target valuation of roughly $30 billion.

'Ultimately, the market wasn't there at that valuation, and so I think as a result, that deal didn't get done,' Khaira said about Firmus' canceled listing. 'The market is thinking what is the right price for neoclouds, what is the right price for these businesses in this moment when interest rates are moving up,' he said.

Despite those pressures on some infrastructure providers, AI companies still cannot get enough compute to power their models, and their appetite continues to drive data center buildout. Khaira downplayed the debt concerns, according to TechCrunch.

Editor's Summary Blackstone's Jas Khaira said concerns about AI-buildout debt are overblown, pointing to the firm's compute financing and investments in Crux AI, Etched, CoreWeave and Firmus. Debt loads and higher rates have pressured neocloud valuations, with CoreWeave shares falling and Firmus canceling its IPO. TechCrunch reported that AI companies' demand for compute continues to drive data-center buildout.