Report flags circular financing as AI firms fund each other

In short: A new report says AI companies often fund each other in ways that can make the boom look bigger than it really is.

What's going on

Researchers at the Bank for International Settlements, a group that studies the global financial system, looked at 1,246 AI firms across areas like chips, data centers, AI models, and apps. They found many “circular” relationships, where money and business flow back and forth between AI companies.

The report estimates that, from 2021 to 2025, more than half of the investment going into AI firms came from other AI firms. Within those AI to AI deals, almost half were between companies that also had a business relationship, like a supplier and a customer.

The researchers list a few common patterns. One is when a big tech firm invests in an AI company and also sells it key equipment, like chips used to train AI systems. Another is when a supplier helps finance a customer so the customer can buy more of the supplier’s products, similar to a car dealer helping arrange a loan (it boosts sales today, but can add risk later).

What to watch

The BIS warns this can make it harder to tell how much demand is “real” versus supported by the industry financing itself. They point to the late 1990s telecom boom as an example, when equipment sellers financed buyers, and the system unraveled when end customer revenue did not show up.

A key issue is visibility. Many AI firms are private and share limited details, and some deals include complicated promises that may only matter in a downturn. That means investors and regulators may not know how risky things are until the market slows.

Source: Financial Times