Enthusiasm for artificial intelligence (AI) in 2022 helped markets defy expectations, with returns exceeding 55 per cent from the Nasdaq-100 and 26 per cent from the S&P 500 in 2023 as investors pursued exposure to the technology trend.
Nvidia, an unexpected winner from the AI boom, reported a remarkable 22 per cent quarter-on-quarter earnings growth in its latest February results, marking a staggering 265 per cent increase from the previous year. Similarly, others like Microsoft have benefited from conviction around enhanced productivity and cloud computing, reporting revenue of US$62 billion in the second quarter of FY23.
In this context, it‘s no surprise that some of the world‘s most prolific asset managers are closely attuned to the AI boom, recognising “enormous” opportunities for investment in the years ahead.
During a keynote speech at a conference in Melbourne this week, Blackstone chief executive and co-founder Stephen Schwarzman highlighted an “explosion” in the construction of data centres, essential infrastructure for enabling the development of artificial intelligence.
“This is like something I’ve never seen,” he said.
Noting Blackstone’s own investments in data centre operator QTS almost three years ago, in an all-cash transaction valued at some US$10 billion, Schwarzman said QTS has since grown sixfold and is predicted to grow further based on internal discussions.
“The amount of money that’s being invested in this area is breathtaking – and it’s happening now all over the world,” he said.
“That company [QTS] is now the largest in the United States, building data centres for AI,” he said.
Forecasting the next big thing adjacent to AI’s explosion in popularity, Schwarzman said he sees opportunity emerging in reinforcing electricity grids worldwide to accommodate the substantial power needs of these data centres.
“The amount of electricity these data centres use is exceptionally high, so what we’re finding is that different states in the US are starting to run out of electricity. The growth rate of electricity in the US was about 1 per cent a year. AI is going to add at least 2 per cent more, some people even think 3 per cent,” he explained.
Schwarzman cautioned that if the AI boom continues to increase electricity demand by 2 per cent annually without a corresponding expansion of the electricity grid, there could be a significant shortfall of up to 20 per cent in grid capacity, and this is excluding the impact of electric cars.
“From an investor’s perspective, there’s something really weird that’s going to go on, and that lack of capacity in the electric grid in the industrial world, with AI and EVs, is creating enormous investment opportunities,” Schwarzman said.
“What we do at BlackStone for a living is find these types of areas and make sure we overly concentrate when we see a trend that is so big and global. If you have the expertise, you’ll do exceptionally well.”
BlackRock president Robert Kapito, also a keynote speaker at the conference, indicated the giant’s similar interest in the electrification of data centres.
Emphasising the need for data centres to be located in areas with robust power infrastructure, Kapito highlighted the investment potential in such infrastructure projects.
“Data centres use a significant amount of power, so they’d have to be built around power, energy, [and] wherever it is, the infrastructure, the grid has to be rebuilt in order to handle the centres. Those of you thinking about real estate, where would you buy it today? I would buy it in places where I can actually build data centres that are around energy,” said Kapito.
“These are opportunities, and when I fold that up, it spells infrastructure to me. Infrastructure is something we all can participate in because it throws out long-duration assets that have a yield and that rings retirement to me.”
Earlier this year, BlackRock announced a $US12.5 billion acquisition deal of infrastructure fund manager Global Infrastructure Partners (GIP), marking its entry into one of the fastest-growing segments of private markets.
At the time, it flagged numerous long-term structural trends that support an acceleration in infrastructure investment, including upgrading digital infrastructure like data centres and cell towers, renewed investment in logistical hubs like shipping ports and airports, and a shift towards energy security and decarbonisation.
“We really believe every area of the world is going to go through an evolution, a revolution rebuilding industries, retooling them for energy, retooling to be much more efficient,” Kapito said this week.
“For us, infrastructure and energy are just really exciting to be in."
Rooting for regulation
Schwarzman also touched on regulating AI, reiterating a belief he shared last year that AI will evolve from its current IQ of around 180 to 200, to 12,000 in the next four years.
According to the CEO, “almost everyone I know is very concerned about what might go wrong with the technology”, especially those working on developing it.
“It’s the first time I’ve ever seen business people rooting for regulation,” he mused.
He predicted the AI revolution will eventually lead to the establishment of a global organisation, akin to the World Health Organisation or World Trade Organisation, dedicated to keeping pace with the evolving landscape of artificial intelligence.
“I was in China two weeks ago, and President Xi was saying, ‘we’ve really got to have some kind of global organisation’ for AI. He said it doesn’t do any good for some countries to regulate and others to not. He said we have to have coordination, and I think that’s widely viewed as where we’re going.”
