A potential exit by 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 tech investor Jack Selby.
Middle Eastern investors, including sovereign wealth funds and government agencies, will account for about a quarter of global investment in AI over the next five years, said Selby, managing director of Peter Thiel’s family office Thiel Capital. He said if the Iran war drags on and countries like the United Arab Emirates and Saudi Arabia redirect investment to rebuilding their countries, the lost capital could spill over into data centers and private and public tech companies.
“I think the market has underestimated how important the Middle East region is for capital investment as it relates to AI and AI infrastructure,” Selby said in an interview with CNBC. “If the Middle East takes some of these projects offline or cancels them, the impact on the market could be much greater than what is currently being suggested.”
Selby’s warning affects high-net-worth investors, family offices and funds that bet on AI trading. Tech and semiconductor stocks were rocked this week by The Wall Street Journal’s report on OpenAI’s missed revenue targets. Selby said the Middle East poses new funding risks as AI companies become increasingly reliant on the region for capital.
oracle, Nvidia and Cisco These are part of OpenAI’s campus in the UAE, where they are building 5 gigawatts of capacity. microsoft Sovereign funds in the UAE and Saudi Arabia have become major investors in private AI companies, with OpenAI reportedly seeking $50 billion from the region’s largest funds earlier this year.
Selby estimates that half of the Middle East’s AI funding is going to data centers located in the region. The other half will be allocated to projects and data centers around the world. He said Middle Eastern funds and companies have already started invoking force majeure and canceling various shipping and business contracts. The big risk is that data centers will start canceling as well.
“The market doesn’t seem to understand that this is a very real situation,” he said. “It’s very volatile. I hope and pray that things get back to normal soon. But it seems to me that the market is underestimating this volatility and risk.”
Beyond war, Selby said AI faces broader risks from overinvestment and speculation. He said investors and founders are indiscriminately inflating the value of AI and infrastructure companies, similar to the dot-com bubble. He said the AI boom is consuming far more capital, with top hyperscalers expected to spend more than $700 billion this year. The destruction of wealth will therefore mask the losses of the dot-com bust.
“AI is a revolutionary technology, don’t get me wrong,” he said. “But it could be an exceptional bubble. There will be extreme winners, and there will be real losers. And those losers will be orders of magnitude larger than the losers we’ve seen so far. When the AI bubble bursts, there will be at least one more zero, and probably two or three more zeros, than the dot-com bubble. The amount will be tens, if not tens of billions of dollars.”
He cited Google as an example from the dot-com era. While investors were jockeying for the value of Ask Jeeves, Infoseek, AltaVista, and other early search capabilities, Google came along and upended their entire business model. He said similar disruptions could occur for today’s AI leaders.
Selby’s AI strategy is to avoid crowding. Selby is launching a second fund with Copper Sky, an Arizona-based VC fund, targeting tech companies outside of California, New York and Massachusetts. He said tech companies in those three states, particularly the Stanford University and Massachusetts Institute of Technology clusters, are getting all the capital and attention. So the best value is elsewhere, he said.
“Probably over 90% of all venture capital investments are going into California, New York and Massachusetts, which is an all-time high,” he said. “The good news is that if you leave these three states and go to the other 47 states, the trading and investment opportunities are much lower cost. That’s what we do.”
Mr. Selby declined to provide many details about Mr. Thiel’s family office, saying only that Mr. Thiel invests in great founders rather than in specific industries. Thiel Capital, which ranks on Inside Wealth Family Office’s list of 15 most active family office investors, has invested in everything from German drone maker Stark and gene therapy startup Kriya Therapeutics to AI employment company Mercor and space research company Varda.
But Selby, a family office director and head of a VC fund that raises money from family offices, said the biggest mistake for many family offices today is making direct investments themselves. A Citibank study last year found that seven out of 10 family offices invest directly in private companies, bypassing funds.
Mr Selby said he could understand why family offices would operate independently, given the dismal performance and lack of distributions by private equity and venture capital funds. He said two-thirds of venture capital firms are “zombie VCs” who are not raising or paying back money and should be shut down.
“Family offices are so frustrated with people like us not giving their capital back, so why shouldn’t they try to get it back themselves?” Selby said. “They couldn’t do worse than a lot of the things[VCs]have done in terms of making investments, not giving money back, keeping a paper trail.”
But at the same time, he said, the typical family office is not well trained in evaluating, valuing and restructuring private companies. Many ultra-high-net-worth investors are motivated by status and peer pressure rather than disciplined returns.
“When these stylish people go to cocktail parties in Manhattan, they have to have something interesting to talk about,” he says. “All their friends are talking about some version of[direct investment]so they have to add something to the conversation, so they do the same thing. The Greek shipping magnate who lives in Manhattan knows nothing about rockets. So why is he investing in SpaceX? Because he just wants something fun to talk about at a fancy cocktail party.”
