US non-public fairness teams have invested billions of {dollars} in information centres serving TikTok proprietor ByteDance, in a dealmaking frenzy now threatened by a US crackdown on Chinese language firms’ entry to one of the best chips.
Blackstone, Bain Capital, Warburg Pincus and Normal Atlantic have backed firms that run Malaysian information centres that depend Beijing-based ByteDance as a tenant, in response to 4 folks with data of the preparations.
Some have executed so with out realizing whether or not ByteDance has been utilizing, or is planning to make use of, the websites to take advantage of a authorized loophole to entry high-end Nvidia chips because it develops its synthetic intelligence potential.
Chinese language firms have been banned from shopping for Nvidia’s highest-performing chips outdoors the US since 2023. However they’ve been in a position to safe entry to them lawfully by renting area in information centres abroad, typically in Malaysia, which include chips owned by third-party firms.
The loophole is ready to be closed in Might by guidelines that ban Chinese language teams not solely from proudly owning such superior US know-how, but additionally from accessing it to assist construct AI massive language fashions which are transferred again to China.
The principles have been issued by Joe Biden’s administration simply earlier than it left workplace.
“If you wish to construct an information centre in Malaysia with Nvidia [chips] . . . you’re going to have to satisfy these sorts of safety necessities that embrace not permitting [China] coaching massive language fashions on these information units,” Alan Estevez, then the US under-secretary of commerce for trade and safety, instructed the Monetary Occasions simply earlier than he left the position final month.
The kind of chips used within the information centres is unclear, and the non-public fairness teams don’t all the time know, partly as a result of the information centre firms don’t personal the chips or lease them to purchasers.
Nevertheless, a number of folks with data of the matter have instructed the FT that ByteDance plans to make use of information centres in Malaysia to entry high-end Nvidia chips.
Buyout teams are inclined to take the view that “you’re offering a constructing with electrical energy and a cooling system; the server and what’s within the server just isn’t your online business”, mentioned a non-public fairness govt.
Lately, ByteDance has made rising use of knowledge centres outdoors China, notably in Malaysia, because it turns into a key participant in China’s AI race. It’s planning massive orders to construct up its abroad AI capability this yr, together with by way of such rental agreements, the FT reported final month. Individually, Normal Atlantic has invested in ByteDance itself.
“There was this sport of cat and mouse the place the [US] commerce division has amended the parameters to seize the chips,” mentioned Matt Rabinowitz, a companion on the regulation agency Pillsbury.
Underneath the brand new guidelines, the id of each the house owners and operators of the chips utilized in information centres should undergo a assessment course of to make sure compliance.
It’s not clear whether or not US President Donald Trump, who stepped up measures towards China in his first time period, will additional alter the laws governing chip exports and their use.
The principles set to take impact in Might may hit the worth of the buyout teams’ investments by lowering demand for the information centres if ByteDance and different Chinese language teams are unable to make use of them to safe entry to one of the best Nvidia chips, mentioned an adviser working within the trade.
Nevertheless, excessive demand for information centres globally would possibly fill the hole, they added.
World non-public fairness teams have raced to spend money on information centres in recent times, whilst different dealmaking exercise has slowed, drawn to the prospect of getting publicity to rising web use and the AI increase.
They’ve tried to distance themselves from the complicated and politically fraught enterprise of chip provide by backing firms that run information centres’ bodily buildings, however don’t personal the chips inside.
“We have now no visibility or affect on the servers and tools that our prospects set up within the information centres,” mentioned Princeton Digital Group, an information centre operator backed by Warburg Pincus.
Bain mentioned its portfolio firms didn’t have entry to the servers inside the information centres they run and added that they “comply with related legal guidelines and laws in all of the jurisdictions we function”. Blackstone and Normal Atlantic declined to remark.
ByteDance is the anchor tenant at an information centre in Johor, a state in southern Malaysia, that’s owned by a unit of Bain Capital portfolio firm WinTrix. It’s also a tenant at a number of different services in Johor, together with ones run by Blackstone-owned AirTrunk, PDG and Epoch Digital, run by Normal Atlantic-owned infrastructure supervisor Actis.
ByteDance plans to spend greater than $12bn on AI infrastructure this yr, with $6.8bn of that earmarked for funding outdoors China. However the US guidelines may complicate that funding.
“ByteDance complies with all relevant legal guidelines and laws,” the corporate instructed the FT.
Warburg Pincus agreed to take a position as much as $300mn in PDG in 2017 and has since injected additional funds. Blackstone accomplished its A$24bn ($15bn) acquisition of Sydney-based AirTrunk, which has websites in Malaysia, Singapore, Hong Kong, Australia and Japan, in December.
Bain purchased China’s Chindata in 2019, merged it with Bridge Knowledge Centres and listed the mixed firm on Nasdaq in 2020. It took the mixed firm, now often called WinTrix, non-public at a $3bn valuation in 2023.
Normal Atlantic accomplished its buy of Actis final yr.