A significant withdrawal of capital from Middle East sovereign wealth funds could destabilize the booming artificial intelligence sector and jeopardize critical data center projects, warns tech investor Jack Selby. Selby, the Managing Director of Peter Thiel’s family office, Thiel Capital, estimates that Middle Eastern investors, including sovereign wealth funds and governmental entities, represent approximately a quarter of all global investments earmarked for AI over the next five years. He suggests that an extended conflict in the Middle East, potentially forcing countries like the United Arab Emirates and Saudi Arabia to redirect their capital towards domestic rebuilding efforts, could lead to a substantial outflow of funds, impacting not only data centers but also both public and private technology companies.
“I believe the markets have significantly underestimated the pivotal role of the Middle East in capital expenditure for AI and its associated infrastructure,” Selby stated in a recent interview. “If the region begins to scale back or outright cancel these ambitious projects, the market repercussions could be far more profound than currently anticipated.”
Selby’s assessment carries considerable weight for high-net-worth individuals, family offices, and investment funds heavily exposed to the AI market. This warning follows a recent Wall Street Journal report highlighting OpenAI’s failure to meet key revenue and user targets, which sent ripples through tech and semiconductor stocks. Selby identifies Middle Eastern funding as another significant risk factor, given the increasing reliance of AI enterprises on capital from this region.
Companies like Oracle, Nvidia, and Cisco are involved in a substantial AI initiative within the UAE, aiming to establish five gigawatts of capacity. Microsoft has committed to a significant $15 billion investment in the UAE by 2029. Notably, the sovereign wealth funds of the UAE and Saudi Arabia have become crucial backers of private AI ventures, with reports indicating OpenAI sought an ambitious $50 billion from major regional funds earlier this year.
Selby further elaborates that an estimated half of the Middle East’s AI-related funding is allocated to data centers within the region, with the remaining half directed towards projects and data center development globally. He notes that Middle Eastern funds and corporations have already begun invoking force majeure clauses to cancel various shipping and business contracts. The paramount concern, he warns, is that this trend could extend to the cancellation of data center projects.
“It appears that markets are not fully grasping the gravity of this situation,” Selby emphasized. “It’s inherently volatile, and while I sincerely hope for a swift return to normalcy, the market seems to be underpricing this volatility and the associated risks.”
Beyond geopolitical instability, Selby points to a broader risk of overinvestment and speculative excess within the AI landscape. He draws parallels to the dot-com bubble, where indiscriminate bidding by investors and founders inflated the valuations of AI and infrastructure companies. The current AI boom is consuming capital at an unprecedented rate, with projections suggesting the top hyperscalers will spend upwards of $700 billion this year alone. Consequently, Selby cautions that the potential for wealth destruction could far exceed the losses witnessed during the dot-com bust.
“Let me be clear, AI is a revolutionary technology,” Selby affirmed. “However, it also possesses the potential to become an exceptional bubble. We will witness significant winners, but also substantial losers. The magnitude of these losses will dwarf anything we’ve seen previously. When the AI bubble eventually bursts, the scale of financial devastation could be amplified by at least one, and likely two or three, additional zeros compared to the dot-com era, resulting in tens, if not hundreds, of billions of dollars in losses.”
He references Google’s emergence during the dot-com era as an illustrative example. While investors were enthusiastically backing early search engines like Ask Jeeves, Infoseek, and AltaVista, Google fundamentally disrupted their business models. Selby suggests that similar disruptive forces could reshape the current landscape of AI leaders.
Selby’s investment philosophy for AI focuses on eschewing the crowded market. With a second fund he is launching at Copper Sky, his Arizona-based venture capital firm, Selby is targeting technology companies located outside of the traditional hubs of California, New York, and Massachusetts. He observes that tech firms in these three states, particularly those clustered around Stanford University and the Massachusetts Institute of Technology, are attracting an overwhelming concentration of capital and attention, thereby diminishing the value proposition for investors. Selby believes that superior investment opportunities lie elsewhere.
“Reportedly, over 90% of all venture capital investments have flowed into California, New York, and Massachusetts, marking an all-time high,” Selby noted. “The upside, however, is that venturing beyond these three states into the remaining 47, one finds deals and investment opportunities that are significantly more affordable. This is precisely the strategy we employ.”
While declining to provide extensive details about Thiel’s family office, Selby conveyed that Thiel’s investment approach centers on backing exceptional founders rather than focusing on specific industries. Thiel Capital, recognized on the Inside Wealth Family Office 15 list for its active investment strategies, has supported a diverse portfolio ranging from German drone manufacturer Stark and gene therapy startup Kriya Therapeutics to AI hiring platform Mercor and space research firm Varda.
As a director of a family office and the head of a venture capital fund that attracts capital from family offices, Selby identifies a critical misstep for many family offices today: engaging in direct investments without the guidance of a specialized fund. A recent survey by Citibank indicated that a significant seven out of ten family offices have ventured into direct investments in private companies, bypassing traditional fund structures.
Selby expresses understanding for the rationale behind family offices pursuing independent investment strategies, citing the lackluster performance of many private equity and venture capital funds and the scarcity of capital distributions. He estimates that two-thirds of venture capital firms are effectively “zombie VCs,” characterized by their inability to raise new capital or return existing capital, and should ideally cease operations.
“Family offices are experiencing considerable frustration with entities like ours, which have not been returning their capital effectively. Therefore, it’s understandable why they might consider venturing out on their own,” Selby commented. “They likely cannot perform worse than many of the current practices within the venture capital ecosystem, which involve making investments without generating returns and relying on paper valuations.”
However, Selby cautions that typical family offices often lack the specialized expertise required for the rigorous assessment, valuation, and restructuring of private companies. He suggests that many ultra-wealthy investors are driven more by considerations of prestige and peer influence than by disciplined investment returns.
“When these prominent individuals attend social gatherings in Manhattan, they desire engaging topics of conversation,” Selby observed. “Their peers are discussing various forms of direct investments, compelling them to participate in similar discussions. A Greek shipping magnate residing in Manhattan, for instance, may possess no expertise in rocketry. Yet, they might invest in SpaceX simply for the allure of having an interesting anecdote to share at exclusive cocktail parties.”
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