Private equity firms have been pumping cash into broadband infrastructure in the U.S. and abroad over the past few years. But another bit of digital infrastructure has also caught their eye: data centers, the lifeblood of the cloud. Several firms investing in this space told Silverlinings they’re looking to capitalize on a market that is primed for explosive growth.
“We’re very big believers in the secular tailwinds that are driving an increased need in data center infrastructure over the next 10, 20, 30-plus years,” Stonepeak Senior Managing Director Andrew Thomas told Silverlinings. “The continued growth of cloud adoption and movement to hybrid and multi-cloud environments, we think we’re in relatively early innings of those trends.”
Thomas also pointed to artificial intelligence (AI) as “tremendous” growth driver.
“That’s going to provide another wave of growth as you have data centers that rely upon GPU servers rather than CPU servers, the higher density of deployments that you need to have, the increased amount of compute that artificial intelligence requires, all of that is going to continue to require substantial capital investment,” Thomas said. “Infrastructure funds are the ones that are providing a lot of new equity investment behind these large private data center platforms today, and that’s going to continue.”
Swooping in
Stonepeak has put its money where its mouth is. Last year, the firm invested $3 billion to acquire a 36% stake in American Tower’s U.S. data center subsidiary CoreSite.
But it’s not the only one that has swooped into the data center market recently. Darrin Webb, Managing Director at I Squared Capital, told Silverlinings that since 2019, its portfolio company BDx has acquired 12 data centers across four countries in the Asia-Pacific region and “has many others in development.” He added that I Squared Capital is “actively seeking to expand its portfolio to cover more countries and deepen its presence in existing geographies.”
Elsewhere, EQT Infrastructure in 2020 acquired global data center provider EdgeConneX, which now has 45 facilities located across North America, Europe and the Middle East, South America, India and the Asia-Pacific region.
That same year, KKR invested $1 billion to form a new data center infrastructure company called Global Technical Realty focused on serving markets in Europe. That company announced plans for initial data center campuses in the U.K. and Tel Aviv, Israel in 2021 and broke ground on the U.K. location in 2022. In 2021, KKR also announced a blockbuster $15 billion acquisition of data center provider CyrusOne, which has more than 50 facilities across the world. That deal closed in March 2022.
And earlier this month Grain Management scooped up a majority stake in a 127,000 square foot data center in Toronto, Canada.
What makes a good cloud investment?
In addition to expected growth in the data center market, Webb noted private equity firms are attracted by the fact that these assets “provide stable cash flows backed by very high-quality customers.” But that doesn’t mean they’re willing to invest in just any data center.
A representative from Grain Management told Silverinings that when the firm is evaluating a data center investment “proximity to leading business and residential hubs, existing electrical and mechanical infrastructure, and available footprint to expand are all attractive factors” it considers.
Both Grain and Stonepeak’s Thomas said they also look for assets which will allow them to leverage their industry expertise and relationships. In Grain’s case, the representative said its specialization in telecom allows it to tap into relationships and value creation strategies that span the broadband ecosystem to “make successful investments.” That includes investments in things like data centers and managed services, the representative said.
Similarly, Webb said several of BDx’s acquisitions allowed it to apply its design and engineering expertise to complete retrofits. “Several facilities in the current portfolio are legacy data centers which were upgraded to international standards. This allows BDx to create a unique product that combines the advantages of centrally located, highly connected data centers and network hubs and newly developed, modern facilities,” he said.
When asked what is on the horizon for data centers, Webb pointed to sustainability efforts around energy and water usage.
“I Squared Capital fosters collaboration between our portfolio companies in the data center, telecoms and renewable energy spaces as they design and operate green projects from the ground up,” he said.
Thomas, meanwhile, said he expects an uptick in traffic at the network edge driven by forthcoming applications which will require a “tremendous amount of investment.” He added Stonepeak’s portfolio companies are “on the front foot of thinking about what those deployments look like” and is doing some exploratory work. However, the timing of those investments is yet to be determined and will be shaped by launch of the aforementioned applications.