Will the AI investment boom mimic that of the railroads? Until recently, most investors took comfort in the fact that, unlike the 19th-century railroads, much of the AI capital investment boom was being financed out of the massive profits earned by big tech companies such as Microsoft, Alphabet, Meta, and Amazon. The expectation was that startup AI companies such as OpenAI and Anthropic—which have comparatively modest revenues—would have no problem raising capital through  IPOs or from deep-pocketed sovereign wealth funds of the Middle East. Easy access to capital was thought to preclude the sort of boom-bust cycle that characterized the railroad era.

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By the beginning of 1873, Cooke had managed to raise only $14 million of the $100 million he had promised, with less than a third of the planned track having been laid. Finding it increasingly difficult to persuade the public to buy Northern Pacific bonds, and unwilling to abandon the project, he began—as a last resort—to pump funds from his own bank into the railroad to bridge its financing needs. Using money from depositors who had the right to withdraw their funds on demand to finance long-term, illiquid investments with an uncertain and distant payoff was a highly risky strategy—and one with echoes of what is currently creating turmoil among private credit funds today.

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…in the last six months two things have changed dramatically over the last twelve months.

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First, estimates of what companies are willing to spend on AI infrastructure keep being revised upward. As in so many preceding booms, even though tech companies may be aware that collectively they are overinvesting, each individual company—believing that the rewards for being one of the winners are enormous—has a powerful incentive to go for broke. Competitive pressures are therefore forcing even the giant hyper-scalers to seek alternative sources of outside capital in the form of debt to supplement their internal funds. More and more data centers are being financed by companies issuing debt, tapping private credit funds, or through special purpose vehicles backed by securitized debt and mortgage bonds.

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Second, in much the same way as the Franco-Prussian War of 1870 dramatically changed conditions on international capital markets, the war in the Middle East has upended the world’s equity and credit markets. Fears that European economies will be squeezed by rising inflation and slowing growth have caused the risk premium on long-term interest rates around the world to spike. Meanwhile the supply of capital from the Middle East is likely to slow, creating a global liquidity squeeze.