Private equity firms have become key players in building new facilities and acquiring existing data centers as they bet on ever-increasing demand for large server farms. The scale of the investments can be enormous, with the $15 billion takeover of CyrusOne by KKR and Global Infrastructure Partners being the largest private equity-funded deal of 2022.
Investors have identified the data center segment as capable of generating above-average growth in cloud and content users. Data centers are desirable investments for private equity funds because they have stable tenants with low levels of churn, especially those in low data center penetration markets.
Private equity providers now account for a large share of new data center developments as companies seek to establish themselves in new US metropolitan markets. This windfall is fueled by the acquisition or merger of 92 data centers since January 2022 for a total of $41.5 billion according to PitchBook data through August 25.
Development of new markets is fueling investment in data centers
Additionally, established data centers use partnerships with private investors to fund entry into new markets. Most of the new data centers being built in new metro areas are being backed by private equity funds. Real estate companies like Lendlease are creating joint ventures, like its first data center in Tokyo, Japan with a private equity partner to spread the costs and risks of a large data center investment.
John Dinsdale, chief analyst at Synergy Research Group says the future looks bright with double-digit annual growth expected in 2022 alone.
“The problem is that building and operating large fleets of data centers is very capital intensive. Even the largest data center operators have had to seek external financing to enable them to meet their growth goals while protecting their balance sheets. While the resulting level of M&A activity has exploded, nearly all of the incremental investment is coming from private equity,” Dinsdale said.
According to a computer research company Gartner, forecasted global data center spending will reach $226 billion in 2022, up 11.4% from 2021.
Yet the speculative nature of investments seems like a safe bet due to the rapid emergence of AI, the rise of streaming, 5G networks, self-driving vehicles and the Internet of Things. The COVID-19 pandemic, which has accelerated a more digital and cloud-based workforce, has also increased the demand for data centers around the world, particularly in Asia.
Although the The United States accounts for about 40 percent of the major global cloud and Internet data sites, investors are focused on Asia to facilitate its expansion. The latest Data Center Pricing (DCP) study reveals that massive investments are being made in data centers by private equity investors, especially as private equity funds focus on markets where it there is a shortage of high-quality, large-scale data center capacity.
Asia’s tech boom is generating interest as investors hope to capitalize on the shift to 5G mobile internet and governments and businesses ramp up computing capacity. Growing competition between companies and geopolitical tensions between the United States and China have also boosted demand for data storage managed by independent third parties. The launch in Asia means they can enjoy lower land costs according to the DCP report. This is because private equity funds can take on more risk for a longer period of time than an established data center provider.
But short seller in the market, Jim Chanos took issue with the pink outlook and raises capital to bet against data center REITs. The companies most present in the future pipeline of new data centers are Amazon, Microsoft, Facebook and Google. They are also the biggest customers for data servers and build their own facilities. Chanos sees them as the main competitor to data centers. Eventually, he sees cloud providers taking the lion’s share of any future growth.
Despite these uncertainties, valuations still look high for data centers.
