Apollo's president warns the AI spending boom may not pay off for investors

In a recent discussion on Goldman Sachs' "Exchanges" podcast, Jim Zelter, the president of Apollo Global Management, expressed caution regarding the burgeoning investment in artificial intelligence. While tech firms are investing trillions into AI development, Zelter warned that investors should not automatically expect substantial returns from these ventures. Reflecting on past technological investments, Zelter noted that the industry has seen similar patterns over the last three decades, from cell phones to various tech applications. He acknowledged the significant utility that AI will bring but raised a critical question: "Will the economic owners reap adequate returns from their investments?" Zelter highlighted the current transformation within the industry, estimating that U.S. data centers might require between $5 trillion and $6 trillion in investments over the next five years. He remarked on the shift from asset-light business models to more capital-intensive operations, indicating that a substantial capital expenditure cycle is underway. Moreover, he stressed the importance of discerning which companies truly represent worthwhile investments, cautioning that just because a company seeks capital does not guarantee it is a sound investment. For Apollo, the increased spending on AI presents a financing opportunity, but it necessitates a disciplined approach. Zelter advised investors to treat higher-risk investments with the proper level of caution, ensuring they are compensated for the risks undertaken. He also emphasized the need for lenders to implement robust downside protections. Zelter's insights come at a time when skepticism about the AI boom is growing. Notable investors like Howard Marks from Oaktree Capital Management have criticized the overly optimistic attitudes toward AI, likening them to a "lottery-ticket mentality." Furthermore, a survey from KPMG revealed that 75% of CEOs from large companies believe generative AI may have been overhyped in the past year, despite recognizing its long-term disruptive potential. Nonetheless, the commitment to AI remains strong, with nearly 80% of those CEOs planning to dedicate at least 5% of their capital toward AI initiatives this year.