Connecting data centres: attracting investors

There are few parts of the global M&A market that have weathered the pandemic quite so powerfully as the data centre sector.

Deal activity has continued to grow despite the tough trading conditions caused by Covid-19.

The first quarter of 2020 saw 15 data centre deals close, with a value of some USD15 billion, exceeding levels seen in the whole of 2019, according to Synergy Research Group. Indeed, with transactions continuing throughout lockdown and with further deals in the pipeline, it is predicted that 2020 deal values could exceed the previous peak year of 2017.

It's not surprising given the speed at which people have moved to remote working and adopted online services in the long months of lockdown.

Add to that the explosive growth of cloud computing in recent years, the advent of 5G mobile technology, advances in AI and increasing deployment of Internet of Things devices, and it’s easy to see why investment in this area is rocketing and attracting an increasingly diverse range of investors.

Major tech companies lead data centre boom

The data centre boom has been led by the giant tech companies, including Google, Amazon, Facebook, Microsoft, Alibaba and Tencent. Their need for data processing on a massive scale has seen them build campuses across the globe, usually self-financed.

We are seeing continued growth amongst these so-called “hyperscale” operators. For instance, Google, which already operates seven campuses outside the U.S., including five in Europe, was reported to have bought a 33-acre parcel of land north of London in October, thought to be a potential site for its first UK data centre.

A raft of independent “neutral host” data centre operators (known also as collocation operators) has emerged in recent years, building, managing and operating centres on behalf of clients across the globe.

Again, they continue to be very active in both acquiring assets on their own behalf and seeking investment from a range of sources to progress expansion plans.

Deals this year include:

• Digital Reality’s USD8.4bn acquisition of Interxion, the biggest data centre transaction on record
• Equinix’s acquisition of 13 Canadian data centres for USD780 million in October from BCE Inc

We are also seeing alternative investment funds looking at data centres and other parts of data network infrastructure as a long-term investment opportunity.

Here PE funds have been particularly active, dominating data centre transactions in 2019 and continuing to invest heavily this year.

Recent developments include:

• KKR announcing plans for a USD1bn investment in European data centres through a newly created platform, Global Technical Reality
• EQT’s acquisition of EdgeConnex

Now the range of funds circling this market is growing, with real estate investors and dedicated infrastructure funds joined by pension and sovereign wealth funds in looking for investment opportunities.

Core asset re-evaluation

Funds’ interest in the market follows a period of re-evaluation of what constitute core and core-plus infrastructure assets.

Traditionally core assets constituted water and power networks delivering predictable, long-term index-linked returns. Now new kinds of assets that replicate these reliable returns are being added to the core category.

Increasingly the view is that data centres and associate network infrastructures, although not monopolistic in nature, do share some of the qualities of utility businesses. The pandemic has provided proof that these digital assets have not only become an indispensable part of modern life but are also resilient to the types of disruption caused by Covid-19.

It remains relatively early days for some funds. These are often complex deals requiring multi-disciplinary skills across real estate, infrastructure, technology, data and finance. Not all funds have worked out where data infrastructure fits into their broader portfolios.

As such, it is too early to say if we will see a wall of money deployed in this market in the next five to ten years, but that certainly seems to be the direction of travel.

Deal varieties

We are seeing a range of deals in the market.

They include:

• continued greenfield developments by the hyperscale players
• further expansion by co-location operators, often seeking investment from funds to finance their growth and increasingly targeting hyperscale clients
• investment in existing, but under-utilised, centres where the owner is looking to monetise spare capacity by bringing in new partners

Platform deals are also becoming more common in line with a trend we are also seeing in the renewable energy sector.

Here, funds are looking to gain entry into the market by buying a group of data centre campuses within a region, often keeping the current management on board to operate the business.

For example, in April Macquarie Infrastructure and Real Assets acquired an 88% stake in AirTrunk to develop and expand its network of data centres across Asia.

Sustainability factors

Data centres are notoriously energy hungry. They are estimated to have accounted for some 1% of global electricity usage in 2018.

Although data centre design is becoming more energy efficient, the risk of tougher environmental regulation remains real as efforts to tackle climate change become more urgent.

Infrastructure funds are under sometimes competing pressure from their investment committees. They are urged to deploy capital at scale, but are also expected to take account of sustainability or environmental, social and governance issues as they do so. This is likely to be a factor when considering whether this is a market they do indeed want to invest in.

All the signs to date show that a growing number of funds believe the investment opportunities in this area far outweigh the risks.

Jamie Palmer, Corporate partner in our Sydney office speaks with Rose Hall, Global Head of Sector BD, to discuss the trending increase in data centre deals and what’s happening in the market to spur this level of activity.

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