Actionable Alternatives: Data Infrastructure

Images on screen: Exterior building, data center, airplane departing

Text on screen: Actionable Alternatives Date Infrastructure

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Kraus: The global secular need for data and the supporting infrastructure to drive development and adoption is one of PIMCO’s highest conviction investment themes at the firm.

Text on screen: Kristofer Kraus, Portfolio Manager, Asset-Based Finance

Whether it’s increased connectivity, cloud adoption, or the use of AI – this is going to have massive implications for the global economy and estimates are that supporting AI growth alone could have a trillion-dollar impact.

We believe PIMCO is in a distinct position to provide flexible financing solutions given our global relationships with hyperscalers, cloud service providers, and operators.

We invest in this theme in primarily three ways on the private side of our business, with a focus on senior, performing private lending opportunities.

FULL PAGE GRAPHIC: AI could contribute 15.7 trillion to the global economy by 2030.

Image on screen: The graphic shows Kristofer Kraus speaking on the left and with a graphic image at right: it shows a small globe with 2024 under it at the right and a much larger globe with 2030 under it; in the middles there are two lines connecting the globes, and it the middle of those lines it says 15.7 Trillion.

FULL PAGE GRAPHIC: The graphic shows Kristofer Kraus speaking on the left and three bullets at left: the first bullet reads AI Chip Financing; the second reads, Data Center Financing and the third says, Data Center Development.

AI Chip Financings include senior asset-backed financings collateralized by GPU chips, network infrastructure, and/or contractual future cash flows derived from contracts with customers.

We also help finance data centers that are already built and/or operational, including senior secured asset-backed debt collateralized by datacenter properties on-lease to high-quality tenants.

Third is the ground-up development of data centers focused on supplying new capacity in high demand markets.

We think the opportunity is quite compelling today, given the advances from AI, constrained existing supply versus high demand from market participants, as well as the acute need for private capital in a market that banks have not been active in.

The importance of artificial intelligence is now well known, with improved labor productivity the most likely near-term economic benefit.

FULL PAGE GRAPHIC: Projected data center power consumption by providers/enterprises. The graphic shows Kristofer Kraus speaking on the left and with two bars charts on the right; the first chart is titled 17 gigawatts with 2022 below it; the second higher bar chart is titled 35 gigawatts with 2030 below.

AI is creating a huge need for both data centers and AI chips, with supply unable to keep up globally. Vacancy rates continue to decline across most global markets, and price increases for new data center capacity.

There is a unique opportunity for private capital to step in and provide attractive financing solutions given the significant capital expenditure required to purchase AI chips and data centers.

Images on screen: Data center

Agrawal: I think AI infrastructure and data infrastructure are in the early innings. We are seeing a significant amount of CapEx requirements in this space.

And the counterparties are looking to finance these opportunities through long-term partners

Text on screen: Vineet Agrawal, Portfolio Manager, Special Situations

and banks have limited presence in this sector providing opportunity for us to come and provide this capital.

FULL PAGE GRAPHIC: PIMCO at the Nexus. Image on screen: The graphic shows Vineet Agrawal speaking on the right and with a spoke and hub graphic image at left: in the middle of the image it says PIMCO with five spokes; clockwise from the top the spokes are Borrowers, Lessees, Cloud Providers, Hyperscalers and Long-term Debt Originators.

I think PIMCO is uniquely positioned to provide capital in this space because we sit in the middle of the nexus of borrowers, lessees, hyperscalers, cloud providers, and long-term debt originators. With this capability, we think we'll continue to provide capital and be a meaningful player in this space.

PIMCO analyzes a data center and AI chip financing as an interconnected whole because they're part of the same supply chain.

In terms of analyzing a particular loan, we want to understand who is the borrower first.

Whether they're performing well or not, whether they have a history of delivering projects on time and of good quality.

Once we get comfortable with the borrower, we want to make sure that lessee is high grade quality, typically A or A minus and higher. We want to make sure that the contract itself is long term. It's not short term contract because we are relying on the contractual cash flow to pay our loan itself. Then we look to make sure that the contract is robust.

It cannot be canceled in various scenarios. It's a take-or-pay contract. Once we get comfortable with the contract, we look at the underlying asset itself. If it's a data center, we want to make sure it's a high collateral value and a loan to value is low. We want to make sure it's in a location where there's supply demand constraints. Supply is constrained versus demand.

Once we do that and we get comfortable with the fundamentals, we look at the relative value of the loan versus what is happening in the public markets. We want to compare it to public side REITs and the public side ABS markets, and want to make sure we are getting compensated for the illiquidity risk which we are taking.

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Disclosures

This material (the “Material”) is being provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy interests in a fund or any other PIMCO trading strategy or investment product.

The investment strategies discussed herein are speculative and involve a high degree of risk, including a loss of some or all capital. Investments in any asset classes described herein may be volatile, and investors should have the financial ability and be willing to accept such risks.

Real asset investments including those in data infrastructure are subject to a variety of inherent risks that may have an adverse impact on the values of, and returns (if any) from, such investments, including: changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for space), the quality and philosophy of management, competition based on rental rates, attractiveness and location of the properties, physical condition of the properties, the financial condition of tenants, buyers and sellers of properties, changes in operating costs, interest rate levels, the availability of financing, potential liability under environmental and other laws as well as the ongoing need for capital improvements, tenant default or distress.

Asset-backed securities are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Structured products such as collateralized debt obligations are also highly complex instruments, typically involving a high degree of risk including default, liquidity, management, volatility interest rate and credit risk; use of these instruments may involve derivative instruments that could lose more than the principal amount invested. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses.

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