How the Hedge Fund Magnetar Is Financing the AI Boom

AI software and the hardware that enables it have been hugely popular investments this year. But there have still been limiting factors on the sector, including a shortage of compute to power so many new start-ups. Investors don't want to finance companies that lack a signed contract for compute, and compute providers don't want to sign contracts for startups that haven't already secured funding. Now Magnetar, a hedge fund which started its first ever venture capital fund earlier this year, is trying to solve this "chicken and egg" problem by offering compute in exchange for equity. Magnetar was an early investor in the AI space, partnering with Coreweave and recently helping the hyperscaler to raise $7.5 billion. On this episode, we speak with Jim Prusko, partner and senior portfolio manager on Magnetar's alternative credit and fixed income team, about why the hedge fund is getting into venture capital and some of the new ways they're deploying money in the space. Read More: Magnetar Starts First-Ever Venture Fund, Targets Generative AI Become a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free. See omnystudio.com/listener for privacy information.

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• 0:55Speaker 01

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• 1:12Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alockway.

• 1:16Joe Weisenthal?

  And I'm Joe Weisenthal.

• 1:18Tracy Alloway?

  Joe, AI is so hot right now. In the immortal words of Mugatu, AI is so hot.

• 1:25Joe Weisenthal?

  It is, yes, it is really hot. You know, you hear some things, oh, there's a little bit of slowing down in some of the progress on the models, but the recent Nvidia results speak for themselves. There is nothing that I've seen yet that would suggest that this macro trend, at least as an investment trend, and I'm not talking about stocks per se, is anywhere close to, quote, slowing down.

• 1:49Tracy Alloway?

  Yeah, and the interesting thing is we seem to be having more and more players, some new types of players that are getting into the space. So, you know, we have AI funds kind of launching left and right. And one of the newest players is a hedge fund called Magnetar, and I know them like primarily for credit stuff. I think they were big in red cap trades for a while.

• 2:11Joe Weisenthal?

  Yeah.

• 2:12Tracy Alloway?

  And now they're launching an AI fund, a VC fund, which is kind of unusual for this type of hedge fund to do.

• 2:18Joe Weisenthal?

  Totally. I mean, I've heard of Magnetar for a long time, obviously, going back to the early 2010s at least. And, look, I'm not surprised that various investors are looking for what is their distinct way into this space. And of course, look, we've done interviews with VCs of various nature and positions in the past. And so I guess, you know, there's sort of two questions to my mind anytime we're gonna be talking to someone investing in early stage or any stage of AI, which is obviously, what is the thesis? What's gonna win out? Where will value accrue? But then from an investor perspective, given so many entrants into this space specifically, whether on the public equity side, whether

• 3:03Joe Weisenthal?

  on the private side, whether on the VC side, early stage, late stage, what do they, as a fund or an investor, bring to the table, or will be able to see that the other billions of dollars competing for AI profits do not see?

• 3:16Tracy Alloway?

  I have a slightly different question, which is for these types of investors, like, how much is it about how good the technology is that they're investing in versus how much is it about getting in the right position in the capital stack? So

• 3:30Joe Weisenthal?

  That's a great question.

• 3:31Tracy Alloway?

  I think it's gonna be really interesting to talk to someone who's coming from this perspective. And without further ado, we have the perfect guest. We're gonna be speaking with Jim Prusko. He is a partner and senior portfolio manager on Magnetar's alternative credit and fixed income team. Jim, welcome to the show.

• 3:50Speaker 04

  Thank you. Great to be here.

• 3:51Tracy Alloway?

  So how does someone on a hedge fund's fixed income team get into AI?

• 3:56Speaker 04

  Well, we have a long history of investments in private companies, really dating back to an increased focus after the financial crisis, when spreads and yields got tighter and the private markets seemed more interesting. And we've often partnered with platforms where we thought we could grow the platform and generate an interesting asset, either a pool of cash flowing assets, or help grow the company and participate in that growth. And support them through financing and other things like we can support them through helping them with hiring or accounting or other systems they need and just to help them grow generally. And so, you know, I've been doing that a long time and we've been

• 4:38Speaker 04

  a number of areas like auto lending in Ireland and then we've moved into various fintech companies. We were one of the first institutional investors in open door before they went public. We're supporting and investing in a very interesting fintech that's financing restaurants right now. And so, we felt we had experience in that space and then that sort of overlapped with our relationship and our investment in CoreWeave where we were the first institutional investor in CoreWeave in 2021. So, we were very early in the trend of putting capital into the AI infrastructure space. And that's just sort

• 5:20Speaker 04

  of grown as this whole market has grown to encompass, you know, literally everything now. You know, we continue to look for smart ways to invest and, you know, one of those ways we felt was what can we provide that's of value? And one of the things we can provide besides the general help we can give a growth stage company is compute because that is the scarce resource right now. And that's where all the capital is going to the various parts of the value chain to deliver compute. And so, there's a competition to get compute. And if you're a smaller company with limited capital or limited access to capital, it can be difficult to get that. And so, that was sort of the value proposition we thought we could bring to bear.

• 6:04Tracy Alloway?

  Joe, I have this vision in my head of VCs like going into startups bearing baskets full of chips.

• 6:10Speaker 04

  Yeah.

• 6:11Tracy Alloway?

  Instead of just saying that like our pitch is the relationship and the coaching.

• 6:14Joe Weisenthal?

  We have access to the chips or the energy plus chips. Just for point of clarification, listeners should know, we've talked to CoreWeave at least twice on the show and it feels like in the AI space specifically, this is one of those names that's a very big deal but not many people. People don't know it the way they know, say, an Nvidia at the very back end or ChatGPT at the very front end. But they build a lot of the AI data centers that are filled with Nvidia chips. I want to get more into the business model there because I have a lot of questions in the business of selling compute, et cetera.

• 6:52Joe Weisenthal?

  But talk a little bit more about, you said your experience in the private side is like this expertise with platforms per se. And when I think of platforms, I think of companies that can acquire lots of other companies or a lot can be built on to them. Talk to us about how the platform-specific expertise informs your thinking with a CoreWeave or any other AI investment that you're making now.

• 7:19Speaker 04

  So we've tried to put capital into companies that are trying to build their business in a particular space. And oftentimes that could be a space where they generate a cash flowing asset, like in the auto loan example. In the open door example, they were acquiring real estate, which was a hard asset. In that restaurant fintech example, they're acquiring restaurant credit. And so we've tried to support businesses that had some kind of asset or cash flow and work with them on a number of ways that we can add value. And I think first and foremost is all these growth stage companies need financing.

• 8:00Speaker 04

  And I think we have great expertise from debt to equity, private to public. And we can be innovative in trying to bring, you know, the best, most appropriate, lowest cost capital to these growth stage companies. And like I said, as well as.

• 8:15Joe Weisenthal?

  So just to be clear, just to understand in this context, what makes AI distinct, say, from other waves of tech? Or what makes it distinct for, say, a magnetar is in part this distinct capital demand that was not perhaps as big of a deal during the SaaS wave of the 2010s.

• 8:35Speaker 04

  Yes, and not only a general capital demand, but in many cases, for many of these companies, a very specific demand to have capital to deploy with compute. And because they need this very specific scarce resource, helping to deliver that resource, and in particular, helping to deliver that resource in a high-quality way, where you have a partner like CoreWeave that has, you know, I think there's a lot of evidence that they have the highest-performing AI training cluster. And so that is really valuable to these companies that might otherwise struggle to get enough compute to further their business model.

• 9:13Tracy Alloway?

  Speaking of CoreWeave, I'm really curious how that conversation actually started, because this was a new and novel thing. I don't think we had chip-based loans before, to my knowledge. And I keep hearing that asset-based financing is going to be like this next big thing in private credit, or it's the last real frontier in private credit. How did you come up with this idea, this deal?

• 9:39Speaker 04

  Well, asset-based financing is really a classic private credit tool. And there's a number of examples. Just if you think about my example with the Irish auto lender. If you buy a loan for a car, so the Irish auto lenders generating car loans, and those go, and you buy them in a vehicle, you have primarily the security of the people paying on those loans. And so you get paid back by the cash flow of the borrowers paying their car loans back. But there's credit risk to that. They could potentially stop paying. And in the case where they stop paying, then you have the car's collateral. And really, that metaphor applies almost directly to GPUs,

• 10:24Speaker 04

  where if you're a company delivering high-performance compute like CoreWeave has, you're contractually selling that compute to some counterparty that's going to use it. And in their case, you know, that's often a very large, very credit-worthy hyperscaler. But not always. There could be smaller startups that have riskier business models. And in that case, primarily by funding the GPU, you're getting paid back with those contractual cash flows on the use of the GPU. But in the case that company fails, then as backup, you have the GPU itself. Now, The GPU isn't really like the car where you'll probably go out and sell it,

• 11:05Speaker 04

  but you get the time back on the GPU which you can then resell to somebody else. And being a scarce asset, you can think about what value that would have in a future time.

• 11:16Joe Weisenthal?

  One difference that I could imagine with the GPU versus other forms of assets, say whether it's a car or say whether it's a house, is a certain here in 2024, still unpredictability about many things in the future. Will Nvidia always be the gold standard, so to speak, in AI chips? Maybe it looks like a yes, but it doesn't seem guaranteed. How fast will the current generation of chips that are deployed degrade in value? I imagine there are fairly predictable sort of depreciation curves for cars that perhaps are more uncertain for chips. And then also the uncertainty of actual deployment,

• 11:59Joe Weisenthal?

  given permitting and challenges with energy and the other operational things that have to do with a new company building a data center. Talk to us about modeling or at least thinking through some of the uncertainties with chips specifically.

• 12:14Speaker 04

  Well, depending what stage you get involved, you have the breadth of all those different risks potentially. So if you're investing in high-performance compute, but it's a greenfield data center, then you have to think about all those things. You have to think about the delivering of the power. You have to think about the timing on all the components to get to the data center. If you're making, you know, what we've been talking about, which is sort of a GPU-based loan, then usually that loan is based upon a running GPU in an existing high-performance compute data center. So you don't really have to think about some of the earlier stage issues. You more have to think about how long is my contract? How good is my contract?

• 12:59Speaker 04

  What do I think the value of renting that chip out will be at the end of that contract? How much rent on that chip could I get if I had to re-rent that in the middle of the contract? So it's more near-term things on actually having a functioning GPU in the data center. But all those other things have to be financed too. And there's going to be innovative and large amounts of capital dedicated to financing those things.

• 13:24Tracy Alloway?

  Setting aside the financing for a second, how hard has it been just to find physical space in data centers?

• 13:32Speaker 04

  Well, it's been extremely scarce and a lot of that is driven by the search for power. The data centers required for the new AI chips are much different than the old data centers. So it isn't really cost efficient in most cases to go and take an old data center and try to retrofit it because the amount of power just alone that has to go there is, transcending an order of magnitude more per rack of GPUs now. And so that's just, you just can't really retrofit that efficiently. It's better to build your own building. And so it's really come down to things like permitting, availability of power, and time to get all

• 14:17Speaker 04

  your components. And you know, all these things have their own lead times. So it had an interesting back and forth with Brian on curing transformers, you know, all these little nuances come into play when you have to build a data center. And so because power is really the limiting factor most of all, you're seeing a lot of moves towards where the power is. And there was recently an article on Bloomberg, I think, about a company in Texas that owns a bunch of land that's now worth $40 billion, right? And that's because they're near all this renewable power. But that isn't the only thing. It's incredibly complex to operate this high-performance compute. So then you have to think about, if I try to build my data center out there where

• 15:00Speaker 04

  the power is, can I get everything out there, including operational expertise, right? Can I staff my data center with the kind of experts I need to run this kind of highly technical, high-performance compute? And each generation's just getting more complicated. We're going to have liquid cooling on the next generation of Nvidia chips, probably immersion cooling right after that. It's very complicated, very expensive, and very difficult to scale, much harder to do in a large size than it is to do in a small size.

• 15:33Tracy Alloway?

  Maybe Magnetar can finance a small modular nuclear reactor. No, seriously, because if you're financing the compute and securing that on behalf of companies that you want to invest in, you could go one layer down, finance the energy.

• 15:47Speaker 04

  And we're certainly interested in that and we have a history in investing in energy. We have investments right now in a developer of utility scale solar power in the US who has leased some of that solar power to various hyperscalers. So that is certainly a space where we're interested in. I was just in Miami, meeting with a company that has a novel heat sink battery technology that they want to deploy to data centers that they're talking to a bunch of data center type companies about launching that product there. So there's a ton of interesting things and just like every other part of this ecosystem, it's going to require an immense amount of capital.

• 16:26Joe Weisenthal?

  I guess just since we're sidetracked on the energy component for now while we're here, novel battery technologies, there's a lot of them out there. There's a lot of startups that have something novel in energy. And often, one of the things that they talk about is this chicken and egg problem where they need capital, they need sort of financing of some sort or another to build the stuff, but the lenders don't really want to give it until there's demand and no one is going to promise to buy it until it's shown that it can work. Can you talk a little bit, I mean, again, I know there's a little bit off track from GPUs themselves, but since you were talking about Well, it's similar with AI, right? Yeah, since you're talking about batteries, can you talk a little bit about that dynamic as it affects solving the energy side of the equation?

• 17:12Speaker 04

  Yeah, for sure. And it has some overlap with the way you look at an AI company too.

• 17:16Joe Weisenthal?

  Yeah.

• 17:17Speaker 04

  If you think about the core things that we really want to look at, it's technology, team and traction. So does their technology really work? That's first and foremost. What is this product? Does it have some kind of advantage? And then traction, like time to market, that's super important. I was just talking to IsoCon at Poolside and like to him, like those are the two most important things, speed to product, speed to market, because it's a race. And even if you have the greatest technology, if you take too long, someone's going to be using something else. And that's certainly true in the energy space where energy is of critical importance.

• 17:59Speaker 04

  So I think that for these startups on the traction side, they really need some strategic partnerships because their cost of capital is very high.

• 18:10Joe Weisenthal?

  Strategic partnership is kind of like an existing company that has a demand, it also has a lot of cash and could theoretically be a buyer of their solution.

• 18:18Speaker 04

  Yes, and really on the other side too. So for example, because their cost of capital is so high.

• 18:26Joe Weisenthal?

  Yeah.

• 18:27Speaker 04

  There's certain things that is hard for them to do. And one of the things that is really hard for all these startups to do, and this was true in the recycling industry and other industries, is build a plant.

• 18:37Joe Weisenthal?

  Yeah.

• 18:38Speaker 04

  Like very expensive, time consuming to build a plant. You don't really want to raise VC, VC capital to build a plant. And so it's important to have a partnership on the manufacturing side too.

• 18:48Joe Weisenthal?

  Got it.

• 18:49Speaker 04

  And that was really like the first thing this battery startup that we, that I just visited talked about is like getting that because you got to be able to deliver your product and you have to deliver it on scale. And ideally, you don't want to be wasting time building your own plant on that. And then like you said, on the other end, you want to have a partnership with the users of the energy, which is all the people that either have data centers or use data centers or are customers of data centers. And you want them to ideally put together an attractive financing relationship where you, in some form or fashion, they're front loading their payments to you so that you can use that capital to actually build the product that they need.

• 19:48Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 20:04Speaker 05

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 20:13Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 20:20Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80 year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 20:40Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 20:48Speaker 01

  With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports and ask chat to research competitors, industry forecasts and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious and ChatGPT can help you do it with confidence. Get started at chatgpt.com.

• 21:26Tracy Alloway?

  So Joe and I went to San Francisco a little while ago and we saw some cool things. I had my first ride in a Waymo and we saw some cool battery related technology. We also saw a lot of VCs. Everyone very excited about AI, obviously. They were also talking about the difficulty of chasing deals right now. How do you compete with those traditional VCs? Or are you just not competing with them directly? Because you're taking the slightly different GPU backed approach?

• 21:56Speaker 04

  You know, I think it's both. I think you're competing with them and to an extent partnering with them. And that's the thing we had to ask ourselves before launching the fund is, you know, what are we bringing to bear that's value added? And in this case, we're bringing to bear the compute. And so often these startups, even if they're backed by a strong VC, can have a bit of a chicken and egg problem, which is. They need compute to develop their product and they need capital to buy that compute, but if they don't have the compute lined up and the price locked in, then the capital might be hesitant to go in because they'd be like, we could put our capital into you and then it could take you an extra six months to get your compute and by that

• 22:38Speaker 04

  time, some competitor has passed you by or the technology has changed. And on the other hand, because they're a startup, they don't really have the creditworthiness to just contract the compute. They most likely have to pay upfront. And so we bridge that gap. And so if we go into a fundraising round where there's a bunch of VCs putting cash in, if they know that we're putting compute in alongside them and that the second the round closes, that compute will be available to the company, that makes it easier to raise the cash part of it. So we are competing and we need that value added to be part of the equation, but also I think it helps them to raise from traditional VCs because we take that one risk off the table.

• 23:22Joe Weisenthal?

  How big is the market of companies that need compute? Because there are plenty of AI companies that just build on top of an existing model like GPT or Anthropic's model, et cetera. How many companies are actually out there and who, like not who are they specifically, but what are the types of companies for whom actual access to compute is an important part of their business?

• 23:50Speaker 04

  Yes, well, you know, it starts, of course, with the LM companies who are using massive, huge, huge amounts of compute. But then if you look at the rest of sort of the AI stack, there's a couple of areas where you're going to need compute. And one is all the small model, custom model companies. And small can mean a lot of different things. So you can have some very small companies that are using a very targeted model, like say in a vertical stack, you might have a robotics company that is specifically training a model to run a robot in a particular situation. And that could be anything from a warehouse

• 24:31Speaker 04

  to doing surgery, right? And they need compute to train that model. Or another one which is huge and dominated by an existing big player is autonomous driving. But there are other autonomous driving companies that are trying to

• 24:48Speaker 04

  Be deployed at other automakers that need compute to train those models or weather models. There's some really good companies that we've talked to doing weather models. They need compute to train their model. And so that that whole model layer, and then even on the app layer, they might be custom elements of small models that they have that sit on top of the big L M's that they need some amount of compute for. So there's quite a range. You know, it's not everyone, you know, it's more in that model application layer and, you know, less in the infrastructure layer that need compute.

• 25:24Tracy Alloway?

  So this is one thing I always wonder about A I investment, which is you have a lot of companies that are building on top of existing models, as Joe mentioned, and to some extent that makes sense because they can save a lot of money by doing it. And realistically, are you going to compete with Google or Microsoft? Probably not. But on the other hand, I always wonder if you're building on top of an existing model, how do you ring fence that business? Because my assumption is if A I gets better, maybe at some point the A I can replicate any A I model, basically.

• 25:59Speaker 04

  So this is the first thing we always worry about is does some giant company already have this product in a closet with like 20 PhDs working on this? And somebody, I was just at this conference and somebody coined the phrase incumbent maximalist.

• 26:16Tracy Alloway?

  Oh, nice.

• 26:16Speaker 04

  And that's the man who you think the incumbents are going to do everything and no one else will ever succeed. And I think there's a few use cases. There's things where it's a very specific task that is hard to do well with a giant general model and probably isn't worth doing well. Like if you're focused on growing tens to hundreds of billions of dollar of revenue, you can't be distracted by trying to do every little thing. And we've seen this in previous tech revolutions as well. And so it can be something that's very focused on a space. We've seen legal, accounting, sales. There's some great companies that

• 26:58Speaker 04

  Have virtual employees that they're doing, things that are very task specific. There's some companies doing text to language and language to text and, and other things for very specific applications. So, you know, that's one way. The other way is data. The greatest ring fence is to any AI company or business is data. Because you've seen as the performance of some of the L L Ms has supposedly flattened out. A lot of that is because they've just used all the data, like they've used, they've trained on the whole internet. There's nothing left. And so now you have to have other ways to train or novel sources of data. So proprietary data is super valuable. And then there just could be areas

• 27:41Speaker 04

  where they're conflicted. They don't want to compete with their customers right now, although, you know, competing with your customers is a great tradition in the tech space. But there could be situations where it's not worth it to them yet to compete with their customers. And so I think there's those different use cases where, you know, you're going to see a small number of companies succeed.

• 28:01Joe Weisenthal?

  I have a very stupid question, and actually I shouldn't even be asking you. I should have asked it the last time we talked to CoreWeave. But since you're here, I'm gonna take them all again, or I'm gonna, on the question I didn't ask them. I know that Nvidia is an investor in CoreWeave, but even setting aside that specific relationship, the actual purchasing of chips, how does the pricing work? And how much is it a de facto auction, whereas demand for chips booms, Nvidia can expand its margin versus Nvidia aims for a stable margin over time? And I imagine this enters into your calculation to somewhat, thinking about a CoreWeave's future capital requirements. How does that market for chips work?

• 28:46Speaker 04

  Well, I can't comment on the internal workings of Nvidia saying their prices.

• 28:51Joe Weisenthal?

  But as an investor and a buyer, whatever you, I'm a buyer of chips. How do, we're, I'd say, I'm, I'm, I want to buy some chips and I want to get in line.

• 28:59Tracy Alloway?

  I imagine it's like the container industry where you have to have a specific relationship and there's a shipping manager called Lars somewhere in Northern Europe who holds the keys to the chips.

• 29:10Speaker 04

  Well, for any company using a resource, and this is certainly true of companies using compute, right? It's always a cost benefit example. So.

• 29:20Speaker 04

  There's great benefits to running your AI training on an Nvidia ecosystem, on a network like CoreWeave that's very fast and very reliable. Because when you train a model, you stop every 15 or 30 minutes to save your work. And if there's a failure in there, you have to go back to the last time you saved your work. And there's a huge loss on that. So there's benefits to using the best technology, but those are quantifiable. And if you're, a particular kind of technology becomes too expensive, you'll see people diversify out, right? I mean, there was just news the last two days about Anthropic and AWS and AWS's new chips.

• 30:04Speaker 04

  So there's always some form of competition. I mean, Nvidia is sitting in a unique place where they've really had a de facto monopoly on this. And I think their pricing is being set in a way that to grow the market, right? Like, they want to grow the market. I can't speak for them, but you wouldn't want to set the price of your product so high that you stifle the market's growth, right? Like, growth is more important than making an extra dollar on every widget. And so I think that's got to be a calculation. And certainly, to date, it's been fruitful in that this market has taken off like almost no market ever.

• 30:57Speaker 01

  With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

• 31:34Tracy Alloway?

  I want to go back to the capital question. And most venture capital comes in the form of equity. You're doing something slightly different. In my understanding, you're primarily going down the debt and sort of fixed income route. That seems so different because in my mind, when I think about bond investing, and we've said this a number of times on the show, it's all about avoiding losers. Right? Like, there's a limited upside, but you don't want a bankruptcy that wipes out your investment, whereas equity, the upside is basically uncapped. So it's about finding that one stellar outperformer or that one lottery ticket. How do you square, I guess, the risk averseness of some of this debt financing with getting

• 32:19Tracy Alloway?

  the huge upside that is potentially there from AI?

• 32:23Speaker 04

  Well, the amount of financing required for this whole AI build out, which is on some immense scale of, you know, people have talked about the Manhattan Project, the building of the interstates. It's going to require capital in many forms for many things. And I think there's a lot of thinking going on, and, you know, certainly we're part of that, in deploying the most efficient capital to the different layers of this build out. And so we've talked about a couple of different things here. We've talked about financing GPUs. So if you're financing GPUs with debt, then you can really think through your downside protection, just like in the auto metaphor, right?

• 33:07Tracy Alloway?

  Right. You have the collateral.

• 33:08Speaker 04

  You have the collateral, you have the contract. You can analyze the creditworthiness of the contract. You can look at how the leasing curves of prior chip generations have decayed. You have some real information there. You have a real asset. You have real contracted cash flows. Now, in the VC fund, that's a lot different. In this case, this is true venture equity. And it's just that it's being deployed in a unique way where, instead of cash, the compute has been contractually secured and is just being exchanged for the equity directly, as I talked about before, saving that step and de-risking the process of acquiring compute for these growth-stage companies.

• 33:53Tracy Alloway?

  So you are doing equity through the VC fund?

• 33:56Speaker 04

  The VC fund is equity, yes. It would be part of typically, but not always, a part of a round that a growth-stage company might be doing.

• 34:06Tracy Alloway?

  Are you doing convertibles?

• 34:08Speaker 04

  So we can do virtually anything across the debt equity, private-public spectrum, and have in many cases. In the AI fund itself, most of the companies being growth-stage are not really in a position to do debt, so I think for the most part, I would expect that those would all be venture equity investments.

• 34:31Joe Weisenthal?

  I gotta chuckle when you're like, oh, we've been in this space since way back. And then you said 2021, but it does really sort of speak to how-

• 34:39Tracy Alloway?

  It feels like a long time.

• 34:40Joe Weisenthal?

  Yeah, well, you know, I mean, ChadGPT, I think, came out at the very end of 2022 or maybe early 2023, and that was the big lightbulb moment for a lot of people. So even being that active in a lot of this stuff a year earlier truly is early. That being said, things like CoreWeave, things like data centers, the need for compute is very well-understood right now in a way that perhaps in three years ago, many people in the credit and financing space weren't thinking of. Is that a margin compressor for you, the fact that other entities, probably many with much more capital than Magnetar has, everyone has now woken up to this opportunity of, yes, there's going to be a lot of financing needs in AI?

• 35:24Joe Weisenthal?

  And do you see change in competition or spreads or anything like that?

• 35:29Speaker 04

  Well, I think it really depends on what you're financing. So there's a lot of capital that's gone into all these spaces, and certainly, all across the stack of financing compute, you've seen a huge amount of capital come in, and you've seen all the giant investment companies, providers of capital, get involved. And so- There's a lot of capital in there, but there's also like a huge need for capital. And it's very complex thinking about the structuring and getting the right capital in the right space. And so I think there's room to be innovative. And I've spent the

• 36:10Speaker 04

  last 20 years at Magnetar thinking about unique ways to source investments and deploy capital. And I think that really comes to bear on this. And because this whole market, like you said, is so new, and we've only had ChatGPT for a couple of years, you're seeing companies with all different ways of working. You know, I talked to a company in the text to voice space at a conference last week, and they actually were buying their own DGX servers themselves and just running them themselves in their own on-prem site. And we're like, sure, like, that's something we can finance. That's like a hard asset. But no one's really looking at that yet, because most of the capital is so big, it

• 36:54Speaker 04

  has to go to the biggest thing. So you have your trillion dollar investment firm, which is a couple, you're not going to want to deploy 20 to 50 million dollars in a one-off thing. You're going to want to deploy tens of billions of dollars in the biggest thing, whether that's power, physical data centers, or GPUs.

• 37:17Tracy Alloway?

  What's the pitch to your investors, to Magnetar's investors? Because again, this is something, I know you said you've been in the tech space for a while, but it's still something that feels fairly new. And when I think about AI, there's been so much excitement over it. Some people have been talking about whether or not it's in a bubble. And I think about a hedge fund, and that's all about uncorrelated returns and investing profitably through the cycle. I get that you might be promising very large upside to investors, but what is the hedge aspect of this?

• 37:54Speaker 04

  Well, as a firm, we've done many different products and many different strategies for many different investors over the years. And we've really been flexible in trying to deploy capital in the most interesting areas that are going to have the best risk-adjusted returns. And many of our investors have been with us through the whole life of the firm since 2005 and appreciate that. And so, we've done both diversified investment strategies where we just thought the general pipeline of deploying structured capital has been great. And then we've also done things targeted at a particular asset when we thought that opportunity was great. And so, in the case of the VC fund, the value proposition really

• 38:39Speaker 04

  is for the investor what it is for the company, which is, we're bringing something unique to these growth-stage AI companies, which will get us access to making investments and what we hope will be the best of those companies with the best business models and the best teams. And so, we're going to use the unique compute that we have in the way that we're going to exchange that for equity and deliver that to these companies as a way of getting access to investments in what's a very, as you mentioned, very competitive environment where there's a lot of capital going into the space. And so, I think for

• 39:21Speaker 04

  investors that want to participate in that kind of investment in getting capital deployed into growth-stage AI companies, this is a very unique opportunity. And so, we saw a lot of traction with that.

• 39:33Joe Weisenthal?

  When you come in as a VC investor in some of these startups, do you have to supply dollars? Or in some cases, or all cases, is your ability to promise compute from day one enough for equity?

• 39:48Speaker 04

  It really varies and there's investments we've made both inside and outside the fund. And it just depends on the situation. So there can be companies that we find super interesting, but don't need compute. And in that case, we could invest in those companies directly outside of the fund. For the fund itself, the proposition is equity for compute. And so the fund itself is focused on companies that really do need equity and are interested in equity and really do need compute and are interested in compute on CoreWeave's network. And so that's the kind of companies that we'll invest in from the fund. But as Magnetar as a whole, we've been focused, like we talked about, on everything from

• 40:32Speaker 04

  energy through infrastructure, through other AI companies that just don't happen to need compute right now.

• 40:39Joe Weisenthal?

  Then just to this point, your ability to promise or give AI startups compute, this access to compute emerged via that initial relationship as a financer.

• 40:53Tracy Alloway?

  This is what I was going to ask, which is how worried are you about competitors doing the same thing and providing GPU-backed debt? Or is it the case that because of your first mover advantage with CoreWeave, you can hold on to that advantage for a while?

• 41:09Speaker 04

  So for the fund itself, it was the unique relationship we had with CoreWeave, where we felt they were the best provider of AI training compute. And we were able to work with them to contract some of the very scarce resource of that and then have that available to deliver to these AI growth companies. And so that was really where we were able to put together something unique because of-

• 41:38Joe Weisenthal?

  And from day one, that was understood to be part of the payoff of being a financing partner to CoreWeave?

• 41:45Speaker 04

  I wouldn't say from day one, I would just say it's part of the natural growth in their business and our growth in investing in the AI market and in being a partner with them. Everyone is both a partner and a competitor in this space and Nvidia has multiple ways that they invest in their customers, as do all the hyperscalers, for example. And so it's really about, are you providing something unique, something that's different? And right now, at this moment in time, we feel like the size of the compute we're providing and the network we're providing it on and the way that we can provide it in real time

• 42:28Speaker 04

  is unique and is valuable to many companies. Now, look, there could be some companies that are getting their compute from somewhere else and it's just not a fit. That's certainly going to happen, but I think there's many, many AI growth companies where this is very valuable to them to get the compute on CoreWeave's network and that's going to lead to a relationship with them.

• 42:48Joe Weisenthal?

  When Amazon makes a VC investment, it's in large part understood that it's the same sort of premise, that they're going to invest in some software company and the money comes right back in because that company has AWS needs and so it comes back. Obviously, we know that not only do the large legacy hyperscalers, not only are they building their own models, many of them, they're building their own silicon and Facebook has its own chips and talked about Amazon and Google has, I forget what their whole thing is called. How do you think about them as competitors to CoreWeave in the sort of pure chips and data center side? I know they're partners, I know they're customers, et cetera, but they are also pure competitors both to say a CoreWeave and to say an Nvidia?

• 43:33Speaker 04

  Yeah, again, everyone's a partner and a competitor. You know, I think the difference-

• 43:39Joe Weisenthal?

  Oh, Google's is TPUs, is their thing. Anyway, sorry, keep going. I just couldn't-

• 43:43Speaker 04

  Yeah, I mean, the difference, as Brian talked about, is the CoreWeave network was built for the ground up to be hyper-efficient at running AI solutions. And so I think it's unique- In that way, and I think that's why it's grown so fast. But certainly, everyone else is trying to build their own out. And there will be other people that will have Nvidia GPU chips. And that will include the hyperscalers. But you know, one of the things we've seen is that this is very hard technology. So it's particularly hard to deploy at scale because you run into like real physics issues, you know,

• 44:26Speaker 04

  surface area to volume type issues of getting this much power to a rack with like, how much cable does that take? How much cooling does that take? How do you run the software layer? Like the software layer to control, you know, a node of eight GPUs is going to be a lot different than if you're trying to run 128,000 GPUs. And so this problem gets more and more difficult and you need better technology and you need highly skilled people. And so the bar is always moving. You know, there's always a next generation chips that's going to be super complicated. Certainly, the blackwell deployments and the incremental

• 45:10Speaker 04

  new blackwell generations are going to be ever more complicated and trickier to deploy. And you've seen issues already, right? You've seen hyperscalers and other competitors in the space have reliability problems or be behind schedule. Like, it's not easy. It's a very complicated technology. You're not plugging your GPU into the wall and it's ready to run an AI model. And so like, I think there's going to be value accruing to skill and efficiency and execution in the space. And you know, that's going to last for a while.

• 45:44Tracy Alloway?

  So some people draw an analogy between the current enthusiastic cycle for AI and the early 2000s period where we had a lot of enthusiasm for internet companies and telecoms and things like that. Do you see evidence of froth out there? Or is it the case that because of the huge amount of initial capital investment that's needed, it's difficult to get, I guess, enough new entrants that this would become a bubble?

• 46:14Speaker 04

  Yeah, everything can become a bubble eventually in in almost any industry that's highly capital intensive. Usually, if there's excess returns, you'll see capital go into it until those returns aren't good anymore. And a lot of capital will go in before you figure out that last part. But this is extremely early. Like, if you look at the capital that went into the internet, and then how that value accrued to both the big tech companies and the startups. People have looked at numbers like $3 trillion of equity value created with the large incumbents, but there was another $500 billion created for the new startups.

• 46:56Speaker 04

  And we're just getting going here, right? We're just building out the kind of data centers, the kind of energy infrastructure. We're just starting to deploy products, right? If you talk to enterprises, they're just starting to implement the most obvious use cases for AI. So I think we're much too early to worry about a bubble. I talked to somebody at a hyperscaler, and they were like, the last thing we're worried about right now is having too much compute.

• 47:27Joe Weisenthal?

  Last question for me. You say we're early. There's still no signs of too much compute. Earlier in the conversation, you're like, this is a Manhattan Project scale project. Give us some flashy number. How much has been deployed in this area? And, you know, over the next 10 years, how much capital is going to be demanded for this space? And how much will be needed?

• 47:50Speaker 04

  So one one number I saw was that in 2023, $37 billion was deployed into AI infrastructure. And in 2033, that number is going to be like $430 billion in that year. So this is trillion dollar scale investment.

• 48:12Joe Weisenthal?

  Cool.

• 48:13Tracy Alloway?

  Cool. All right, Jim Prusko, thank you so much for coming on All Thoughts. That was great.

• 48:17Speaker 04

  Thank you for having me.

• 48:18Joe Weisenthal?

  That was fantastic. Thank you so much.

• 48:33Tracy Alloway?

  Joe, there's two things that I hear consistently about AI. And one is it's going to need a lot of capital,

• 48:39Joe Weisenthal?

  Yeah.

• 48:40Tracy Alloway?

  which Jim spoke to. And then the other thing I always hear is, well, at some point, AI companies have to actually produce revenue. And I guess the question is, like, are they going to start producing revenue in time to pay back that massive capital need?

• 48:55Joe Weisenthal?

  Yes, it's very interesting because, look, I believe that there are companies that are getting productive value out of AI models. Like, I believe that exists. But, you know, you talk about hundreds of billions over the coming years in financing. In the end, that is going to have to come from profitable deployment to customers.

• 49:16Tracy Alloway?

  Right.

• 49:16Joe Weisenthal?

  And so like, this to me is like, you know, still a bit uncertain. I do think the financing that we talked about is extremely interesting, just in the context of this conversation.

• 49:27Tracy Alloway?

  Yeah, absolutely. The GPU-backed loans, yeah.

• 49:30Joe Weisenthal?

  Well, both the GPU-backed loans and the opportunity that that affords a company like Magnetar to make GPU capacity in lieu of cash for equity investments is extremely interesting. And so, and then you get this second order effect. So A, you're providing something that other VCs can't because you are giving them access to compute on day one. And then B, other VCs want to enter that deal because they know that they're going to be investing in a company that is not going to be have to scrambling for compute once they get that VC cash.

• 50:03Tracy Alloway?

  It's a very sort of middle way approach because I think so far, the way we've seen AI investment unfold is either it's a sort of picks and shovels approach where you invest in the chip companies themselves and the data centers, or it's you invest in the AI companies that are doing cool things. But this is kind of both.

• 50:22Joe Weisenthal?

  It is exactly both. And it sort of sounds like some combination of foresightful planning and also stumbling into a very good situation by which the firm's relationship with CoreWeave, dating all the way back to 2019. 2021 does now give them this a certain edge in the VCR. It's just a really, it's, this is a fascinating sort of open frontier in many respects.

• 50:48Tracy Alloway?

  I still want to know who came up with the idea for chip-based financing. Jim kind of evaded that part of the question, but I want to know what those initial conversations were like.

• 50:56Joe Weisenthal?

  Yeah, it's also just interesting to think about that on some level, the analogies are like an Irish car lender. Right? So it's like, on some level, this is a very novel area and with technology that is highly uncertain. And then, on the other hand, if you're invested in a car loan company, you could sort of get it.

• 51:15Tracy Alloway?

  Yeah. All right. Shall we leave it there?

• 51:17Joe Weisenthal?

  Let's leave it there.

• 51:18Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 51:24Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Kermit Rodriguez at Kermit Armin, Dashal Bennett at Dashbot, and Kail Brooks at Kail Brooks. Thank you to our producer, Moses Andam. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have transcripts, a blog, and a daily newsletter. And you can chat about all of these topics, including AI 24/7 in our Discord. Go there, check it out, discord.gg/oddlots.

• 51:50Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we dig into the capital structure of AI investments, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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