Markets underpricing the risk of Middle East AI pullback

A possible withdrawal of Middle East sovereign wealth funds could drain hundreds of billions of dollars from the AI ​​boom and threaten key data center projects, according to tech investor Jack Selby.

Selby, managing director of Thiel Capital, Peter Thiel’s family office, said Middle Eastern investors, including sovereign wealth funds and government institutions, will account for about a quarter of global investment in artificial intelligence over the next five years. If the Iran war continues and the United Arab Emirates, Saudi Arabia and other countries direct investments into rebuilding at home, the lost capital could ripple through data centers as well as public and private technology companies, he said.

“I think markets underappreciate how important the Middle East region is in terms of capital spending as it relates to AI and AI infrastructure,” Selby said in an interview with CNBC. “If the Middle East starts taking some of these projects offline or starts canceling some of these projects, the impact on the market could be much, much, much larger than what’s currently being suggested.”

Selby’s warning has implications for high-net-worth investors, family offices and funds investing in AI trading. A. Wall Street Journal report Missing revenue targets at OpenAI this week rattled tech and chip stocks. Selby said the Middle East poses another financing risk as AI companies become more reliant on the region for capital.

Seer, Nvidia And Cisco It is part of OpenAI’s campus in the UAE to create 5 gigawatts of capacity. Microsoft It plans to invest $15 billion in the UAE by 2029. The UAE and Saudi Arabia’s sovereign wealth funds have become key investors in private AI companies, and OpenAI reportedly sought $50 billion from major funds in the region earlier this year.

Selby estimates that half of the Middle East’s AI funding is allocated to data centers located in the region. The other half is allocated to projects and data centers around the world. He said Middle Eastern funds and companies have already started canceling various shipping and business contracts, citing force majeure. The biggest risk is that they start canceling data centers as well.

“The markets can’t seem to grasp that this is a very real situation,” he said. “It’s a very volatile situation. I hope and pray it will return to normal soon. But it seems to me that markets are underpricing this volatility and risk.”

Beyond war, AI faces a broader risk of overinvestment and speculation, Selby said. He said that like the dot-com bubble, investors and founders indiscriminately increased the values ​​of artificial intelligence and infrastructure companies. He said the AI ​​boom is consuming much more capital, and the best hyperscalers are expected to spend that capital. More than $700 billion this year. So the destruction of wealth will dwarf the losses of the dot-com crash.

“Artificial intelligence is a revolutionary technology, don’t get me wrong,” he said. “But it could also be an exceptional bubble. There will be extreme winners, and there will be some real losers, too. And those losers will be much bigger than the losers we’ve seen before. When the AI ​​bubble bursts, it will be at least one more zero, possibly two or three more, than the dot-com bubble. That will be tens of billions, if not hundreds, of billions of dollars.”

He cited Google as an example from the dot-com era. While investors were driving up the valuations of Ask Jeeves, Infoseek, AltaVista and other early search functions, Google came along and disrupted entire business models. He said similar disruptions could happen to today’s AI leaders.

Selby’s AI strategy is to avoid crowds. With his second fund launched at Arizona-based VC fund Copper Sky, Selby is targeting tech firms outside California, New York and Massachusetts. He said tech firms in those three states — particularly the Stanford University and Massachusetts Institute of Technology clusters — are attracting all the capital and attention. So the best values ​​lie elsewhere, he said.

“Probably over 90% of all venture capital investments went to California, New York and Massachusetts, which is an all-time high,” he said. “The good news is you go outside those three states and go to the other 47 states, the deals, the investment opportunities are much, much cheaper, and that’s what we’re doing.”

Selby declined to provide many details about Thiel’s family office, saying only that Thiel invests in big founders rather than specific industries. Thiel Capital was included in the ranking. 15 in Varlık Family Office The company, which is on the list of the most active family office investors, has invested in everything from German drone maker Stark and gene therapy startup Kriya Therapeutics to AI rental company Mercor and space exploration firm Varda.

But as a family office manager and head of a venture capital fund that raises money from family offices, Selby said the biggest mistake for many family offices today is making their own direct investments. A Citibank survey last year found that seven in 10 family offices invested directly in private companies without recourse to any funds.

Selby said he understands why family offices are striking out on their own, given the dismal performance and lack of distribution of private equity and venture capital funds. He said two-thirds of venture capital firms are “zombie venture capitalists” who do not raise or return money and should close down.

“Family offices are so fed up with people like us not giving back their capital, why wouldn’t they try it themselves?” said Selby. “They couldn’t do worse than most things [VCs] “We were doing it in the sense of investing, not giving the money back, leaving a trace on paper.”

But he also said typical family offices are not adequately trained in evaluating, valuing and restructuring private companies. Many ultra-wealthy investors are motivated by status and peer pressure rather than disciplined returns.

“When these fancy people go to cocktail parties in Manhattan, they must have something interesting to talk about,” he said. “All his friends talk about some version of this [direct investments]. So they need to have something to add to the conversation. So they do the same thing. A Greek shipping magnate living in Manhattan knows nothing about rocketry. So why invest in SpaceX? Because she just wants to have something fun to talk about at the fancy cocktail party.”