It’s too early to know whether circular artificial intelligence investments between chipmakers, hyperscalers and AI start-ups pose a systemic risk. But such deals, which resemble vendor financing in key respects, and largely centered around Nvidia, are proliferating.
Circular investment in a value chain occurs when companies, which are sequentially linked in the production process (e.g., supplier, manufacturer, distributor), make reciprocal equity investments in each other. This creates a loop or web of ownership and capital flow among entities that are also bound by operational or commercial contracts.
That can foster deeper collaboration, secure supply, and potentially align long-term strategic goals. But, such practices also increase systemic risks, in a manner similar to the use of leverage.
The tight interdependence means a financial or operational failure at one company can quickly propagate throughout the entire chain.
If a key supplier (Company A) experiences a significant loss, the value of the manufacturer's (Company B's) investment in A drops. This loss on B's balance sheet can then trigger a financial stress that impairs B's ability to fulfill its obligation to the distributor (Company C), and so on.
The same is true for financial contagion risks, where a localized default or failure ripples through the ecosystem.
Circular revenue is another problem. One entity makes an investment that is then used by the recipient to purchase products or services from the investor.
That circular flow of capital inflates revenue but arguably produces zero or negligible net economic gain. Such deals also then inflate financial and equity values of the firms.
Some recent circular deals in the artificial intelligence space include:
Nvidia’s $6.3 billion Master Service Agreement (“MSA”) with CoreWeave
Nvidia’s planned investment of up to $100 billion in OpenAI in exchange for the latter’s deployment of Nvidia GPUs
OpenAI’s stake in CoreWeave and its $22.4 billion multi-year GPU purchase commitment signed to date with CoreWeave
Nvidia’s $5 billion investment in and joint R&D arrangement with Intel
SoftBank’s $2 billion investment in Intel
SoftBank, Oracle (ORCL), and OpenAI’s joint efforts in “Project Stargate,” valued at up to $500 billion
OpenAI’s $300 billion cloud capacity purchase commitment with Oracle
There might not be a problem now, but observers wonder if systemic risk is being created that could emerge later.
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