Firms such as Blue Owl Capital have raised trillions in investing firepower. The artificial-intelligence build-out is a perfect match, though warning signs are flashing.

Not long ago, Blue Owl Capital was an upstart investment firm that lent money to midsize U.S. companies such as Sara Lee Frozen Bakery.

These days, the firm is financing massive data centers costing tens of billions of dollars for the likes of Meta and Oracle —a sign of just how quickly Wall Street has become the enabler of America’s artificial-intelligence boom.

Fund managers such as Blue Owl amassed trillions of dollars of investing firepower and have been hunting for big deals where they can put that money to work. They found slim pickings for years until a perfect match appeared in AI, which has provided a bigger target than anything in history due to the vast sums tech companies need to ramp up computing power.

“We’re talking about numbers that are so large, even in the low cases,” said Blue Owl co-founder Marc Lipschultz . “Does it even matter if you keep counting after you get to $1 trillion of capital expenditure in the next couple of years?”

Last week’s selloff in tech-related stocks and bonds marked some of the most serious warning signs that the frenzy could be overdone. But any worries on Wall Street about a possible investment bubble have largely been trumped by the fear of being left behind.

Lipschultz and co-founder Doug Ostrover jumped into the fray at a posh retreat in California’s Ojai Valley for dozens of tech VIPs and celebrities in the spring of 2024. Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella were there, along with Pharrell Williams and Serena Williams.

The Blue Owl duo, Wall Street superstars who built the firm into a $295 billion fund manager in 10 years by perfectly timing a surge in private lending , looked like just two money men in office sneakers and fleece vests. But the billionaires—co-owners of a professional hockey team who have talked of “skating where the puck is going”—seized the opportunity to get in on the AI boom.

While David Guetta DJ’d, the Blue Owl executives cut a deal to acquire IPI Partners, an investment firm that owned and operated big data-centers for Amazon and Microsoft.

Blue Owl already had close ties with the organizer of the retreat, Iconiq Capital, which manages the personal fortunes of Silicon Valley elite—including Zuckerberg—and was a part-owner of IPI.

The purchase gave Blue Owl a seat at the table to bid on mega AI financings. Not long after, it got picked to arrange a $14 billion package for an Oracle and OpenAI data center in Abilene, Texas.

Then, last month, Blue Owl raised about $30 billion to build an AI data center for Meta in Louisiana, putting in $3 billion of its clients’ money and borrowing the rest. The deal included a provision, considered extraordinary on Wall Street, giving Blue Owl’s equity investment a debtlike guarantee in case the partnership falls apart—showing the new financial wizardry bankers are conjuring to meet AI’s ravenous financial demand.

Spreading the risk

Silicon Valley’s biggest players are flush with cash and were able to fund much of the initial AI build-out from their own coffers. As the dollar figures climb ever higher, they are turning to debt and private equity—spreading the risks and potential rewards more broadly across the economy.

Some of the financing is coming from plain-vanilla corporate bond sales, but financiers are making far bigger fees off giant private deals . Virtually every Wall Street player is angling to get a piece of the action, from banks such as JPMorgan Chase and Morgan Stanley to traditional asset managers such as BlackRock .

Investor appetite for data-center debt is so strong that some money managers have booked billion-dollar gains in a matter of days, even before construction of the facilities they are financing is complete .

Still, the longer-term performance is hardly assured. Big tech companies are expected to spend nearly $3 trillion on AI through 2028 but only generate enough cash to cover half that tab, according to analysts at Morgan Stanley.

Big names in the financial world, such as Goldman Sachs CEO David Solomon , are warning about AI-fueled froth in the markets and in capital spending.

At the same time, the fear of missing out is real. Days after Solomon voiced his concerns to analysts, Goldman formed a new team in its banking and markets group focused on AI infrastructure financing .

“What we do know for certain is that the [big tech companies] that want the world to spend trillions have huge financial incentives to be believers. In case you haven’t noticed, Wall Street is also being paid a lot to promote the story,” Greenlight Capital, the hedge-fund firm run by David Einhorn , wrote in an October letter to investors.

There have been some wobbles of late. Stock prices normally go up when a company reports record revenue but after Meta did just that on Oct. 29, its shares plummeted 11% instead. The reason: Zuckerberg disclosed he will “aggressively” increase capital spending on AI, drawing questions from analysts about how the company plans to actually make money off the new technology .

If the AI market blows up, the blast radius would be wide, hitting not only Wall Street firms, but also pensions, mutual and exchange-traded funds and individual investors, because of how debt is often sliced and resold across the financial landscape.

The bonds financing Meta’s Hyperion data center in Louisiana can be found in Main Street funds offered by BlackRock, Invesco, Janus Henderson and Pimco . Investors in Blue Owl’s latest $7 billion digital infrastructure fund include the state pension plans of Pennsylvania and New York.

Funds that invest in AI deals say they carry little risk, because tech companies with deep pockets have ironclad leases that will generate the money to pay investors back. Microsoft has a higher credit rating than the U.S. government, and it told investors on Oct. 29 that it would double its total data-center footprint in the next two years.

Tech executives see more risk in underbuilding than overbuilding. “I thought we were going to catch up. We are not. Demand is increasing,” Microsoft finance chief Amy Hood said.

But some tech companies are weaker financially than others. Oracle, which is angling to be the go-to computing provider for labs like OpenAI, is by far the most indebted tech giant in the mix. It needs to borrow billions more for its spending spree, prompting Moody’s Ratings and S&P Global Ratings to edge closer to reclassifying Oracle’s bonds as junk debt. In recent weeks, the company’s stock price has fallen 32% and its bonds have lost about 7%.

There’s also the risk that the chips tech firms are borrowing to buy could be obsolete in a few years. Apart from its data-center investments, Blue Owl is lending money to an effort to buy Nvidia chips that will be leased by Elon Musk’s xAI.

The last time Wall Street went all-in on an industry was the fracking boom—then bust—over a decade ago. This time, financiers are marshaling even larger sums.

The combined borrowing of every oil-and-gas company in the world from 2012 to 2015 was about $1 trillion, according to data from Dealogic. A handful of AI tech giants will borrow roughly $1.2 trillion from 2025 to 2028, according to the Morgan Stanley estimates.

A new boomtown

As it happens, Blue Owl’s data-center project in Abilene is on the edge of the West Texas oil patch that was the epicenter of the fracking boom.

In late September, the firm invited executives from about 40 pensions, endowments and other institutions that invest in its funds to see the data center that will eventually rise from the Texas prairie. The investors donned hard hats and piled into five-person buggies to get a tour of the Abilene campus, which has a 5,000-car parking lot built just for its construction workers.

The crews in Abilene are assembling eight different data-center buildings spanning around 4 million square feet. The campus will ultimately draw up to 1.2 gigawatts of power, or enough juice for about a million homes. Lining the insides will be around 500,000 Nvidia chips stuffed into dense racks requiring constant cooling.

Financially, the venture depends heavily on Oracle, which has leased it for 15 years. Oracle, in turn, will rely on a single customer, Sam Altman’s OpenAI, for some $300 billion in long-term revenue. Meanwhile, Oracle is buying chips from Nvidia, which has committed $100 billion to OpenAI—the sort of “circularity” that raises questions about whether AI revenue is being recycled.

The roughly $10 billion in loans taken out to build the Abilene project come due in five years and will be difficult to refinance if the Oracle-OpenAI partnership underperforms. Blue Owl offsets the higher risk of contracting with Oracle by charging higher rent than companies like Meta pay, a person familiar with the matter said.

Many AI deals resemble the big buyouts private-equity firms have done for years , in which they raise a mound of debt to juice returns on their investment. In Meta’s Hyperion project, Blue Owl put in $3 billion from its private-equity funds and $27 billion borrowed from bond investors at a 6.58% interest rate.

The firm expects to make returns of about 13% annually off Meta lease payments, people familiar with the matter said. The new business could boost Blue Owl’s stock, which has declined 35% this year as concerns about private-credit defaults mounted .

“There will be speculative AI investments. That’s not what we’re doing,” said Alexey Teplukhin, the Blue Owl managing director who ran the Hyperion investment.

A crazy hypothetical

Banks are getting in on the action too. About a year and a half ago, bankers at JPMorgan got a call from a longtime client with what sounded like a crazy hypothetical: How would you finance a project to build a campus of AI data centers that would draw one gigawatt of power?

The bankers told their client, a developer and landlord called Vantage Data Centers, that it would never need that much capacity. But they walked through how they would theoretically raise the money.

Earlier this year, Vantage called JPMorgan to say it wanted to pull the trigger, with one tweak. Instead of building a single 1-gigawatt data center, it wanted to build two of them. Not long after, JPMorgan and a group of other banks agreed to lend $38 billion for a data center in Texas’ Shackelford County and another one outside Milwaukee, Wis.

The five-year debt package, named Jacquard, was so jumbo-size that more than 30 other banks, from global giants such as JPMorgan to regional players such as U.S. Bancorp, were tapped to sell portions to investors. They are pitching insurers, corporate debt funds and almost every type of bond buyer.

Morgan Stanley has decadeslong ties to top-tech companies , and the firm’s bankers began pitching them financing options for big data centers two years ago. The effort delivered in October, when the bank arranged deals worth about $75 billion in one week, including the debt for Meta’s Hyperion, the $20 billion sale of Aligned Data Centers and a $3.2 billion junk bond.

“I’ve been doing this for 25 years and I’ve never seen a week like that,” said Anish Shah, Morgan Stanley’s global head of debt capital markets.

$2 billion in three days

AI infrastructure dealmaking can be extremely lucrative for money managers, if everything goes according to plan.

In the case of Jacquard, the debt pays interest of about 6.4%, almost 2 percentage points higher than the yield on a comparable corporate bond from Oracle. Other deals have delivered far bigger gains.

When Blue Owl went looking to borrow the money it needed for the Meta project, the firm and Morgan Stanley settled on Pimco, an asset manager known for its expertise in fixed income. Pimco committed to buying $18 billion of the bonds, ensuring the deal’s success, but demanded a high interest rate and guarantees in exchange.

Talk of the deal circulated over the summer, and other funds asked to participate but were shut out. That created pent-up demand, and when the bonds began trading in October, prices jumped by about 10% in a matter of days, giving Pimco $2 billion of paper profits. Prices have slipped slightly since then, trimming the gains to a mere $1.1 billion.

Bond funds are clamoring for the deal because it delivers high returns, or yields, typical of junk bonds but with protections associated with investment-grade credit ratings. Ratings firms scored the bonds so highly because Meta pledged that bondholders and Blue Owl will get all their money back, even if it stops leasing the data center.

“Even if the loot ends up not being as glorious as everyone thinks it may be with AI, we still think these are the best companies in the world,” said Blue Owl’s Teplukhin.

Write to Matt Wirz at matthieu.wirz@wsj.com and Peter Rudegeair at peter.rudegeair@wsj.com