Musk's xAI is attempting to build and control the world's most powerful data center along with a large natural gas power plant to supply it. However, the company's strained financial situation has forced it to adopt unusual financing arrangements that shift most of the fundraising pressure and associated risks to external partners.

According to The Information, Musk's long-time supporter Valor Equity Partners is raising $20 billion for a special purpose vehicle (SPV) to purchase NVIDIA chips and lease them to xAI. This arrangement means that xAI will initially not actually own the hundreds of thousands of NVIDIA chips planned for deployment at the second mega data center in Memphis, known as Colossus 2, nor will it control the gas power facility supplying the center.

This financing structure highlights a reality: investors are struggling to write enough large checks to support Musk's strategy. The entire financial framework relies on xAI generating sufficient cash flow to cover rental payments while also repaying raised debts. The $5 billion debt package raised by xAI in July had bond and loan interest rates as high as 12.5%, equivalent to the cost of financing for companies in financial distress. According to earlier media reports, xAI is burning through $1 billion per month.

$20 Billion Chip Leasing Plan Insiders reveal that the SPV consists of $7.5 billion in equity and $12.5 billion in debt, with Valor leading the equity part and NVIDIA contributing up to $2 billion in equity. The SPV will lease the chips to xAI for several years, with xAI having the option to purchase them at the end of the lease term.

This transaction shifts the fundraising and most of the risks onto Valor Equity Partners. This venture capital firm manages approximately $17.5 billion in assets and has achieved significant success by supporting multiple Musk projects, but it is now venturing into large, complex infrastructure projects that differ drastically from its traditional fund management business.

Valor's Chief Investment Officer, Antonio Gracias, a long-time partner of Musk, is a board member of SpaceX and worked this year in a government efficiency department led by Musk.

The SPV only pays for the chips, excluding the energy infrastructure or other assets necessary for Colossus 2. If xAI no longer requires these chips, the SPV can lease or sell them to other companies. This arrangement allows xAI to avoid upfront cash payments.

According to insiders, xAI owns the land for Colossus 2 and currently has about 100,000 NVIDIA GB200 chips in operation. The company aims to deploy another 200,000 chips in the coming months. Musk expressed last summer the hope that Colossus 2 would ultimately have 550,000 chips, although he has also separately indicated a desire for the site to have 1 million chips.

High Equity Proportions Indicate Risks While other companies, including cloud service provider CoreWeave, have also raised billions based on NVIDIA chip collateral, most of those deals had leases underpinned by large, profitable companies like Microsoft.

This transaction led by Valor will become the largest chip mortgage deal to date and carries additional complexities. Valor itself is an investor in xAI, and if xAI fails to cover rental fees or opts to buy the chips at the end of the lease, it may find itself in an awkward position. Given that the chips will be installed in xAI's data centers, it's unclear how easily the SPV could find other buyers, as moving the chips would be costly.

The equity proportion in this deal is close to 40%, significantly higher than the 10% to 20% equity stakes common in recent data center transactions. This provides lenders with considerable cushion in case of xAI defaults, though purchasing the chips ultimately raises transaction costs. An individual who heard an early pitch noted that lenders were informed the equity proportion could reach as high as 50%.

In contrast, Meta Platforms is raising $3 billion in equity and $26 billion in debt for a data center being built in Louisiana, encompassing the entire center rather than just chips. According to insiders, the Valor-led chip transaction aims to reduce xAI's overall financing costs.

Joint Venture to Build Gas Power Plant To supply power to Colossus 2, xAI is relying on another partner.

In April, the company formed a joint venture with Texas-based Solaris Energy Infrastructure, which leases gas turbines to data centers and oil and gas companies. According to securities documents, a limited liability company associated with xAI holds a 49.9% stake in the joint venture named Stateline Power, while Solaris owns 50.1%.

A subsidiary of xAI injected $86 million in cash into the joint venture, while Solaris contributed $86.4 million. Stateline has secured a floating-rate loan of up to $550 million, currently around 10.25%.

Stateline is installing turbines at a site owned by xAI's subsidiary in northern Mississippi, located about a mile from Memphis' Colossus 2. Securities documents indicate that through direct leasing and Stateline, Solaris expects to provide xAI with a total of over 1 gigawatt of power by early 2027.

Securities documents show that Stateline has ordered at least 66 turbines, with procurement commitments valued at $450.4 million. During a visit to the Mississippi site in September, at least 7 turbines were already operational.