(Bloomberg) — When some of Wall Street’s most prominent CEOs recently appeared on TV with Nvidia Corp.’s Jensen Huang, touting their $500 billion pact to finance AI chips, one participant stood out.
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Waldemar Szlezak, global head of digital infrastructure at KKR & Co., is a relative unknown outside the world of data centers. Yet there he was in a CNBC interview last week, along with BlackRock Inc.’s Larry Fink, Blackstone Inc.’s Jon Gray and David Solomon of Goldman Sachs Group Inc.
Szlezak, 49, reports to Brandon Freiman, who leads KKR’s infrastructure business in North America, and his profile has risen rapidly since he joined KKR in 2019, thanks to the artificial-intelligence boom.
He previously worked at Soros Fund Management, where he was a senior managing director focused on originating, structuring and monitoring that firm’s communications infrastructure and real estate investments. Szlezak, an engineer by training with a bachelor’s degree in mathematics, is known for writing an infrastructure newsletter read by some of KKR’s top executives.
He was a key player in finalizing the firm’s $15 billion acquisition of CyrusOne in 2022, a cornerstone of its data-center strategy. KKR had just weeks to find another equity partner to clinch the deal, and Szlezak helped secure a $3 billion equity check from Global Infrastructure Partners to add to KKR’s $3 billion investment, according to people with knowledge of the matter.
KKR and GIP, which is now part of BlackRock, declined to comment.
Szlezak was also the driving force behind Helix Digital Infrastructure, which KKR launched in June as a standalone company to offer all-in-one data center-development capabilities after securing more than $10 billion to fund the enterprise, the people said.
The firms have provided scant details about when the Nvidia deals will be announced and how they’ll be structured. But a key question is whether Nvidia’s promise to guarantee 25% of the residual value of the chips will adequately compensate for the risks of a technology that can quickly become obsolete.
Nvidia is following a playbook established by others including Broadcom Inc., which also used a residual guarantee as part of its $35 billion chip financing backed by Apollo Global Management Inc. and Blackstone. KKR is also participating in that deal, the people said.
KKR sees certain servers, or computers containing chips, as an asset that will still have value after six or seven years and continue to generate revenue streams that can be financed, Szlezak said in the CNBC interview.
The firm is more concerned with the credit-worthiness of its counterparty than technology risk, with the view that older chips can still have demand from customers, one of the people said.
“While Nvidia’s credit profile will remain healthy, risks to consider include the pro-cyclical nature of these backstops,” which become more relevant in “severe, abrupt downturns,” CreditSights analyst Andy Li wrote in a note. This program may result in “industry overbuild,” Li wrote, meaning that the supply of chips could eventually exceed demand.
The Nvidia deal is a non-binding memorandum of understanding between the chipmaker and the asset managers. KKR’s commitment is expected to be primarily credit financing and come from a variety of investment strategies, one of the people said.
After the Crash
KKR’s infrastructure business, led by Raj Agrawal, was founded in the wake of the 2008 financial crisis, when bets made by some earlier-moving peers crashed and the firm sensed an opportunity.
It recently closed its largest infrastructure fund and now devotes about $120 billion to the strategy, up from $38 billion five years ago. The returns it generates rival KKR’s private equity business, long a source of strength for the 50-year-old firm.
In recognition of that growth, KKR made Agrawal, 53, head of both its infrastructure and real estate businesses in a newly combined unit called Real Assets. He’s a member of management committee, giving him a say over the strategic direction of the firm, which managed almost $800 billion as of midyear.
KKR, which touts its risk-focused approach to infrastructure, has steered clear of some of the large data-center deals done by its peers because it’s cautious about the amount of leverage being put on the transactions and the earnings they would have to generate in order to manage the debt load.
The firm isn’t investing in assets with contracts that renew in five to seven years, and it’s steering clear of digital infrastructure assets where valuations are in the range of 30 times earnings because they need substantial growth to avoid losses, Agrawal said this month in an interview with Bloomberg.
KKR owns six data-center businesses globally with a focus on managing operations and guaranteeing power supply.
“We view this as a generational investment opportunity,” Szlezak said in the CNBC interview.
Helix Backers
When KKR launched Helix Digital in June, it named Szlezak chief investment officer of the venture and appointed Adam Selipsky, who previously led Amazon Web Services, as chief executive officer. The business is backed by Nvidia, utility Vistra Corp., the Kuwait Investment Authority and KKR.
Helix is exploring raising more capital by bringing on additional partners, particularly in Asia, including those in the electrical cooling and network sector, one of the people said.
KKR sees Helix eventually being worth tens of billions of dollars, one person said.
The alternative asset manager, meanwhile, is mulling an initial public offering of CyrusOne, according to a person with knowledge of the matter. That business suffered a major outage last year at a Chicago-area data center that handles trillions of dollars in trading volume each day. The Information previously reported on the potential IPO.
As Nvidia chip deals start to become a reality, KKR will need to show that it can manage the risk from financing assets with fluctuating values amid concerns about circular financing and overexuberance in AI, and keep generating the returns that have vaulted the infrastructure team to prominence internally.
In a November report, Szlezak and his colleagues said there was both froth in parts of AI and real breakthroughs in models and applications, with no signs of data-center overbuilding in the US.
“When a single chipmaker, Nvidia, makes up 8% of the S&P 500, it’s reasonable to wonder whether an AI bubble is inflating,” they wrote. “Lately, that scrutiny has extended to data center investment.”
Their conclusion: “Yes, there’s froth. Yes, there will be a shake‑out.”
https://finance.yahoo.com/technology/ai/articles/kkr-data-center-chief-vaults-113000247.html
