Research shows that the AI market’s potential for future gains is well founded, with AI development expected to increase global GDP by 7% in the next ten years. The post-Covid era has accelerated digitalisation, redirecting investors and market focus towards AI and related technologies.
Generative AI (GenAI), bridging technological advancement and economic growth, presents both opportunities and challenges. There is an optimistic projection that GenAI could catalyse groundbreaking scientific research, lead to a renaissance of innovation and productivity and bring about unforeseen efficiency that could lead to a quantum leap in economic output and wealth generation.
In the coming years, GenAI will be a key source of automation, transformation, and competitive advantage. This shift will likely impact the securitization market in amplifying financing/investments in the AI-related asset class while providing huge opportunities to securitization players to improve the quality and efficiency of their operational processes.
How has global AI investment unfolded thus far?
In February 2024, the US announced a $5 billion investment to boost its semiconductor industry amidst a growing demand for AI tech hardware. As per the European Investment Bank, the EU accounts for only 7% of annual equity investments in both AI and blockchain technologies, while the US and China together account for 80% of the investments. Europe has the ambition to reach at least 20%, in value terms, of the world’s production of cutting-edge and sustainable semiconductors by 2030. Concurrently, the EU Commission has proposed investing, from 2021 onwards, at least €1 billion annually in AI through its Horizon and Digital Europe programs. By September 2023, €4.4 billion has already been invested into AI.
How securitization/structured finance is supporting AI growth?
Given the promising returns from the new asset class, we have been seeing an increasing appetite from investors in securitization vehicles investing in AI-based startups. A prime example is the AI interactive platform ChatGPT, backed by OpenAI’s startup fund, which raised $10 million through a special purpose vehicle (SPV) (“OpenAI Startup Fund SPV I, L.P.”) in February 2024. Similarly, an American AI startup, Anthropic, received investment via an SPV created by Menlo Ventures. This unique approach allows small investors to pull funding while ensuring compliance with venture capital regulations.
This global trend of using SPVs when structuring investments is explained by their ability to pool resources from multiple small-scale investors to fund high-potential AI-related industries and their possibility for high returns. Traditionally, entry into such promising startups or companies required private investors to put up large sums of money, and navigate oftentimes complex regulatory and legal frameworks. However, with the aggregation of investments from multiple contributors in one streamlined SPV, or one compartment, investors can raise the critical level of funds, and usually at a much quicker pace.
The heightened attention towards AI from global leaders and private investors is likely to ignite a new wave of securitization vehicles, stimulating increased activity in the debt market to finance AI-related projects.
References
Generative AI could raise global GDP by 7%, Goldman Sachs, April 2023
Artificial intelligence, blockchain and the future of Europe, EIB, June 2021
Coordinated Plan on Artificial Intelligence, EIB, March 2024
United States Securities and Exchange Commission, January & February 2024