Beyond Operations: AI, Debt, and The Balance Sheet
The AI CapEx boom has raised funding costs and captured investor attention. This makes financing strategy and clear investor relations increasingly important for traditional businesses.
In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner, is joined by Anke Richter. Anke is a credit strategist at ISP Group and a veteran of the bond market. She has worked on trading floors, on the investors’ side, and for Moody’s, the rating agency. Anke has recently authored a major report on data centre financing in the bond market, one of the most comprehensive currently available. Through this work, she gained some interesting insights which will be valuable to the board community.
“A lot of companies think about the impact of AI on the operational business, but do not look at what it means for their financing side. I think that might be a blind spot”
In Anke’s research, one of the biggest takeaways for her was the focus on operations in AI conversations. Finance and the capital side were secondary, if they came up at all. However, AI is in a CapEx boom worldwide, and it pulls investor attention away from traditional businesses.
“The demand for capital, and that means also the competition for capital, is increasing quite significantly”
Anke notes interest rates are up, but hyperscalers and data-centre developers are not price sensitive like other industries or even governments. Anke sees capital as more expensive on both the debt and equity sides. This means firms have less debt capacity and higher hurdles to earn back the cost of capital.
“This is not temporary”
Over the last 15 years, money was cheap. Loose monetary policy was the norm. Now rates are returning to historical levels. This is a challenge for younger companies and younger workers who haven’t seen such rates in over a decade. Anke cautions firms not to imagine that rates will go down in the next 12 months, and to re-examine what an optimal capital position is with current or even higher rates.
“If you are in an environment where a lot of attention is going towards AI-related sectors, if you want to grab investors’ attention, you need to have a very sharp offering”
For non-AI businesses, Anke says interest is shrinking. This is true in the stock market and in private capital. The quality of the business doesn’t matter – AI is taking up all the oxygen.
To compete, Anke recommends that traditional businesses sharpen their offering. Update and tighten up materials. Messages must be conveyed clearly and directly, and be quite polished, to compete effectively with AI for capital. Get a third-party review to identify blind spots and weaknesses. There is no time, and no mercy, for basic mistakes these days in investor relations.
“One thing is clear: AI is here to stay”
AI is impacting operations, but firms also need to consider what AI will do in the future to the capital markets. There’s a boom now; there will be overcapacity later. While it is tempting to say things are different this time, Anke notes that cycles are never different in the long run, and smart firms can plan now to position themselves for success as the AI cycle evolves.
The top three takeaways from our conversation for effective boards are:
- If you look at AI, don’t just look at the operational side. Think about financing.
- Don’t assume funding will get cheaper anytime soon. Assume it’s going to be higher and consider what your optimal capital structure is under such scenarios.
- It’s always a good time to take a critical look at your Investor Relations function. Is your material and story fit for purpose in an environment where there’s more competition?
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