Markets underestimate risks of AI withdrawal in the Middle East

The potential withdrawal of Middle East sovereign wealth funds could drain hundreds of billions of dollars from the artificial intelligence boom and threaten major data center projects, according to technology investor Jack Selby.

Selby, who is managing director of Peter Thiel’s family office, Thiel Capital, said investors in the Middle East – including sovereign wealth funds and government bodies – account for nearly a quarter of global investments dedicated to artificial intelligence over the next five years. He said that if the Iran war continues, and the UAE, Saudi Arabia and other countries shift their investments to rebuilding at home, the lost capital could spread across data centers as well as public and private technology companies.

“I think the markets haven’t appreciated how important the Middle East is for capital spending in terms of AI and AI infrastructure,” Selby told CNBC in an interview. “If the Middle East starts stopping some of these projects or canceling some of these projects, the impact on the market could be much greater than what they are currently proposing.”

Selby’s warning has implications for high-net-worth investors, family offices and funds betting on AI trading. A Wall Street Journal report this week about OpenAI’s missing revenue targets rattled technology and chip stocks. Selby said the Middle East poses another risk to financing, as AI companies become more dependent on the region for capital.

oracle, Nvidia and cisco It is part of the OpenAI campus in the UAE to build 5 GW of capacity. Microsoft It plans to invest $15 billion in the UAE by 2029. The sovereign wealth funds of the UAE and Saudi Arabia have become major investors in private AI companies, with OpenAI reportedly seeking $50 billion from major funds in the region earlier this year.

Selby estimates that half of AI funding in the Middle East is allocated to data centers located in the region. The other half is allocated to projects and data centers around the world. He said that funds and companies in the Middle East have already begun canceling various shipping and business contracts under the pretext of force majeure. The big risk is that they are starting to eliminate data centers as well.

“Markets don’t seem to realize that this is a very real situation,” he said. He added, “The situation is very volatile. I hope and pray to God that it will return to something resembling normal soon. But it seems to me that the markets are underestimating this volatility and risks.”

Besides war, AI also faces a broader risk of overinvestment and speculation, Selby said. As with the dot-com bubble, he said investors and founders are randomly viewing the values ​​of AI and infrastructure companies. He said the artificial intelligence boom is consuming more capital, and major companies are expected to spend more than $700 billion this year. So the destruction of wealth will overshadow the losses of the dot-com crisis.

“AI is a revolutionary technology, don’t get me wrong,” he said. “But it could also be an extraordinary bubble. There will be big winners and there will also be some real losers. And those losers will be bigger than any of the losers we’ve seen before. The AI ​​bubble, when it bursts, will have at least an extra zero, maybe two and three zeros more than the dot-com bubble. That will be tens, if not hundreds, of billions of dollars.”

He cited Google as an example from the dot-com era. While investors were bidding on the values ​​of Ask Jeeves, Infoseek, AltaVista and other early search functions, Google came along and turned all their business models upside down. Similar disruptions could happen to AI leaders today, he said.

Selby’s AI strategy is to avoid crowds. Through a second fund he is launching at Copper Sky, his Arizona-based venture capital fund, Selby is targeting technology companies outside California, New York and Massachusetts. Tech companies in those three states — especially Stanford University and MIT — are attracting all the capital and attention, he said. The best values ​​lie elsewhere, he said.

“Probably more than 90% of all venture capital investment went to California, New York and Massachusetts, which is an all-time high,” he said. “The good news is as you get out of those three states and go to the other 47 states, the deals and investment opportunities are much less expensive, and that’s what we’re doing.”

Selby declined to provide many details about Thiel’s family office, saying only that Thiel invests in large founders rather than specific industries. Thiel Capital, which was named to Inside Wealth Family Office’s 15 list of most active family office investors, has invested in everything from German drone maker Stark and gene therapy startup Kriya Therapeutics to AI recruitment company Mercor and space research company Varda.

However, as a family office manager and head of a venture capital fund that raises money from family offices, Selby said the biggest mistake many family offices make today is making their own direct investments. A Citibank survey last year found that seven in 10 family offices made direct investments in private companies, without going through a fund.

Selby said he understands why family offices have been so self-reliant, given the poor performance of private equity and venture capital funds and the lack of distributions. He said two-thirds of venture capital firms are “zombie VCs” that don’t raise or return money and must close.

“Family offices are very frustrated with people like us, who haven’t returned their capital, so why not try it themselves?” Selby said. “They couldn’t do much worse [VCs] “We did what we do in terms of making investments, not returning money, and putting marks on paper.”

However, at the same time, he said that typical family offices are not adequately trained in assessing, evaluating and restructuring private companies. Many wealthy investors are motivated more by status and peer pressure than by disciplined returns.

“When these fancy people go to their cocktail parties in Manhattan, they should have something interesting to talk about,” he said. “All their friends talk about some version of [direct investments]. So they should have something to add to the conversation. Therefore, they do the same thing. A Greek shipping magnate who lives in Manhattan knows nothing about rockets. So why invest in SpaceX? Because he just wants to have something fun to talk about at the fancy cocktail party.”