Margin Points - Arnold Engel<br>The action is off-balance sheet<br>Private equity carry loans, OpenAI's $665B in fine print, Shohei Ohtani<br>June 24, 2026 · [Essay 94]<br>You are an executive at a private equity backed business. The board member (PE guy) who has spent the past two years pushing to gin up the company for a sale in 2027 suddenly is pumping the brakes and talking about how we should go for a bigger exit in 2030. Bewildering, but, OK, this happens. Then you find out months later that the change of heart has to do with a big loan that the board member personally took out and has nothing to do with the company. Maddening, and real: the number you thought you were going for changed on you and you didn't even see how it happened.
This week, the Financial Times highlighted the growth of "carry loans," in which banks lend money to private equity operators on the basis of their future share of profits. According to the FT:
"Private equity executives have long been able to borrow against unpaid carried interest, or their cut of profits from successful deals, but the broker said it had never seen such high demand. [up over 3.4x last year]"
OK, so private equity guys want to borrow. Sure. But management should know how much and how it changes incentives—otherwise they are staring at a decoy. The loan sits off-balance sheet for the company, but it may be the most important thing. We're seeing this dynamic popping up in more places, like OpenAI, VCs, and even Shohei Ohtani's Dodgers contract.1
In many cases, it seems like the other partners in the private equity firms don't know or are being jostled. Partners are squeezed into taking out loans themselves to match the "duration" of the partners who have already taken on debt.2 Do you trust your partners who are closest to the business or is that gone because you don't even know your partners' incentives anymore? LPs, investors in the private equity funds, are clueless in many cases and not blissfully so.
Funds always had different incentives at play between junior partners who needed the money to come through and senior partners to whom the money was already a way to keep score. This sharpens that divide. This feeds back into the impact on the portfolio companies themselves; the less stable the decision-making at the fund, the rockier the road for portfolio companies.3
OpenAI has kept a huge amount of its obligations off-balance sheet.4 The Information reports that OpenAI only spends $46M per quarter on capital expenditures—microscopic for its scale:
"The fine print of the financial statements shows OpenAI has $665 billion of purchase commitments stretching out over the coming years for chips, energy and data centers."
Public-market investors will have to wrap their heads around the $665B to feel comfortable with the stock; the $46M is misleading. Partners, like Oracle or SoftBank, are already the cause of some of the opaque jumble.5 It's possible that the complicated partner deals are positive for all involved, but it's harder to know.
Despite signing a $700M-over-10-years contract6 with the LA Dodgers, Shohei Ohtani is taking only $2M/year in salary and deferring the remaining $68M/year for ten years—interest-free. When the four-time MVP pushes his salary off, likely for personal tax reasons, the Dodgers win by funneling the saved cash to Ohtani's teammates.7
Now, it's one thing if Ohtani is living in financial restraint (relatively—hello LA!) for 10 years to facilitate this. It's part of his "off-field performance" and can be tolerated by opposing fans. That changes the moment we find out that a bank has stepped in to lend against his contract.8 The living on $2M/year isn't real. A sacrifice that you can borrow against wasn't much of a sacrifice.
Disclosure is obviously a big deal here. OpenAI is working on all that now that it has filed confidentially to go public. Eventually, we'll find out if Ohtani is on a clean unlevered contract or if the bankers who camped out to try to pitch him after batting practice got a deal done. In baseball, even against the greatest pitchers you can at least see the pitches coming. Some of these pitches aren't even happening in the stadium.9
VCs can borrow against future carry as well. For PE and VC, they can come in different flavors. Some are secured against carry alone, while others require other collateral as well, and some require personal guarantees. ↩
To some extent. ↩
The Financial Times explains further:
"Enness said the loans could be secured against the so-called carry alone, meaning that a lender could not seize an executive's personal assets if the forecast profit share never materialised. One lender who provides the funding said, however, that they did not rely on future carry alone as collateral. Another bank said its financing decisions were based on a client's overall financial position including diversification of income. It said lenders typically applied conservative assumptions and examined...