It’s a crucial moment for debt investors looking to get in on artificial intelligence.

This week, US chipmaker AMD announced a deal worth tens of billions of dollars to supply OpenAI with chips to massively scale the computing power of ChatGPT’s creator. On the other hand, the Bank of England warned that financial markets could be exposed should expectations around the impact of AI become less optimistic.

JPMorgan CEO Jamie Dimon said in an interview on Thursday (9 October) that, while he believes AI in total will pay off, some of the money being invested would "probably be lost”.

That’s the backdrop for private credit providers in Europe navigating the wave of investment opportunities linked to the AI boom. And there’s catching up to do with US peers, who are already striking multi-billion private credit deals for AI companies.

“The pure tech side of things is still mostly for venture capital, but data centres for example are a big opportunity for direct lending in Europe,” said a debt advisor to 9fin.

Such assets in Europe that benefit from AI demanding ever more computing power and already create income are attracting sponsors, according to a private equity executive, and then maybe also private credit firms.

Data centre financing has relied heavily on bank loans and BSL markets, stated a report from law firm Hogan Lovells in September. But with higher development costs and more urgent refinancing needs, private debt has started to appear as a financing tool as well, typically in the form of structured finance deals.

Data centre tenants are amongst the biggest investment grade companies in the world, according to Hogan Lovells, and private investment grade is the trade of the moment, as 9fin observed this week.

Data centres hit market

However, the kind of blockbuster private credit AI deals seen in the US have yet to materialise in Europe. That could change with more supply coming in.

European private equity firms are launching €17bn of European data centre sales this autumn: Oaktree Capital is looking to sell a stake in UK-based Pure DC, which is valued at up to €5bn; Partners Group is exploring a sale of Nordic data centre operator atNorth for up to €4bn; and EQT has kicked off the sale of GlobalConnect, its Nordic broadband and data centre business worth around €8bn.

Germany’s DWS Group also seeks to offload its NorthC Group data centre unit for around €2bn, reported the Financial Times this week.

To be sure, private credit firms in Europe have been very keen recently to invest in the wider software sector. More than 25% of private loans in Europe since the start of the year are linked to IT companies, according to 9fin data.

Software and IT firms often feature strong revenue visibility, contracted or subscription-driven demand profiles, high cash generation, and little cyclicality, which makes them attractive targets for private debt investors, said Ardian Private Credit’s Mark Brenke in a 9Questions interview.

Some of the IT and software companies direct lenders are looking at provide AI-based solutions, such as Italian consultancy services firm Iconsulting or Germany’s automotive tech provider Eucon Automotive.

AI trickling down

The question of how AI might impact a business, its margins, and creditworthiness, is now being asked for almost every sale or refinancing, software or not.

“Will this company benefit from AI? Will it become obsolete because of any disruption caused by AI? Could it hit its growth plans and profitability?” said the debt advisor.

That’s an issue even for the most attractive of credits. In a recent sale process for a software provider in Europe, one source recounted that there had been little doubt about the strong cash flow of the business, the stickiness of its customer base, and this drew debt offers at the high end for leverage levels and at the low end for margins.

“But some people had concerns about whether AI tools could simply remodel these software solutions in a few years time, automate all the processes, and basically make the entire company useless,” said the source.

It’s tough to make decisions on investments that last for years under these circumstances, they added. “It’s so dynamic. Everything can be turned upside down tomorrow because of AI. Sometimes that just feels absurd.”

Direct lenders are also getting worried that some of the tech companies they come across are just free-riding on the AI train. “Every single tech company says the AI boom is an advantage to them. Every single one. Someone is lying, and it can be tricky to know who that is before it’s too late,” said a lender to 9fin last month at the IPEM conference in Paris.

Speaking of conferences — 9fin and law firm Weil hosted the Weil & 9fin Private Credit & Restructuring Autumn Forum in London on Wednesday (8 October), with discussions on the supply/demand imbalance, credit funds getting creative in order to work with sponsors of their choice, and the latest on the First Brands bankruptcy, which sent shockwaves across the restructuring and private credit markets.

European private credit pipeline

On the post-restructuring side, 9fin’s private credit team this week covered UK fertility research and treatment clinic network TFP Fertility, which Alcentra took over through a debt-for-equity swap and now looks to sell.

Also in the UK, Brookfield, CVC, and Lone Star are among the interested private equity firms considering a bid for UK-based Smiths Detection, with first-round offers for Smiths Group’s sale of its detection equipment business due next week.

Meanwhile private credit firms are returning financing indications on STP in Germany ahead of first-round offers for the auction of the legal tech software provider also next week, with strong private credit appetite, high potential leverage, and pricing expected to come out in the Euribor+475bps region.

Hg is in the process of buying German accountancy software firm Diamant Software from its family owners and debt providers are gathering views on Germany’s Kununu following a lender education for a sale of the online employer review platform.

France was also busy as Capza and Adagia were among the potential bidders for French building services and maintenance firm Myrium, while sale processes for healthcare software firm Sofia Développement and telehealth company Medadom are coming up.

You can read our weekly updated pipeline of new and in-market deals here.