Fortress warns private credit lenders against ‘FOMO’ in AI rush

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorFortress warns private credit lenders against ‘FOMO’ in AI rush'Not all good trends or good long-term projections will translate into good investments for every type of assets'Author of the article:Last updated 17 minutes ago Jack Neumark argues that conviction in AI as a transformative technology shouldn’t be confused with conviction in every piece of debt used to finance it. Photo by Laura Proctor/Bloomberg via Getty ImagesAs the artificial intelligence boom creates a massive new market for private credit, Fortress Investment Group is warning lenders against rushing into deals out of a fear of missing out.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountJack Neumark, co-chief executive of Fortress, which manages about US$55 billion in assets, said the economics of lending to data centres and other AI infrastructure are fundamentally different from investing in their equity. Credit investors get a largely fixed return if the technology takes off, while still bearing the risk that asset values can fall — potentially trapping them in an illiquid investment if things go wrong.“If we go into big data centre opportunities or big GPU opportunities or other technology-focused investments, as a credit investor, you’re not getting paid for that upside and you’re stuck in the investment if it goes sideways,” Neumark said Monday at the Milken Institute’s Global Dialogues event in Toronto, coinciding with the Canada Investment Summit.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againThat asymmetry is becoming more important as private lenders move deeper into financing the infrastructure underpinning AI. The technology requires enormous amounts of capital, but its rapid evolution also makes it harder to determine what specialized assets financed today will be worth by the time longer-dated loans mature.Assets exposed to unusually rapid technological change are being financed with capital whose returns are capped and which can be difficult to exit. Equity investors can accept that uncertainty in exchange for potentially outsized gains. For lenders, the upside is limited to the terms of the loan even as they remain exposed to deterioration in collateral and recoveries.Neumark argues that conviction in AI as a transformative technology shouldn’t be confused with conviction in every piece of debt used to finance it.“Not all good trends or good long-term projections will translate into good investments for every type of assets,” he said. “The relative value or the relative pickup that you’re going to get by doing a credit investment in AI infrastructure or other AI investments is not so material that you can justify taking incremental risks to get that exposure.”For Neumark, that puts duration, residual value and recoverability at the center of the underwriting. He said illiquid credit investors should “stay short duration,” understand the residual value of assets backing their loans, and ensure there is a way to exit or restructure an investment if needed.Jenny Johnson, CEO of Franklin Templeton, which has about $1.8 trillion under management, said the pace of technological change is already altering how investors assess credit risk. The firm’s technology specialists have worked with its private credit team to examine individual sectors and the timing of potential disruption from AI.AGF Investments Chief Investment Officer John Porter also pointed to data centers as an example of how traditional investment silos are breaking down. Evaluating the sector requires investors to consider the political environment surrounding data centers, the fixed-income implications of financing them and the equity upside from AI proliferation, he said. Toronto-based AGF Management oversees about C$74.2 billion ($53 billion) in assets.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.For private credit, the challenge becomes particularly acute with specialized infrastructure such as GPUs. Lenders need to consider not just demand for computing power, but what the collateral could fetch if the technology or economics shift before the debt matures. That makes the ability to restructure or exit — and matching the duration of the loan to the uncertainty of the asset — critical.“A big part of what this next five years is going to look like is people making sure that they’re investing for the right reasons with the right companies and the right structures and not exhibiting FOMO,” Neumark said.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.