Cloud demand drives private equity firms to buy data centers

Facility operators and analysts believe that an injection of investor capital may assist to contain escalating data-center lease costs.

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In spite of a general deal-making downturn, private equity companies purchased data centers in almost record numbers last year in an effort to meet the rising demand for cloud computing and data storage.

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Analysts claim that this may be good news for chief information officers and other business technology leaders because a once-abundant supply of data-center space has quickly filled up and increased the rents that facility owners charge.

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According to estimates released this week by commercial real estate services company CBRE Group Inc., the average monthly rate in primary data-center markets increased 14.6% from the previous year to $137.90 per kilowatt of power last year. This was the first year-over-year price increase since 2017.

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According to Sean Graham, director of cloud research at market research firm International Data Corp., an influx of investor capital could help keep prices in check by expanding the market. "The impact of private equity will be providing capital to fund the construction of new data centers, or expand existing ones, to meet the growing demand."

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According to market research company Synergy Research Group, private equity companies made up more than 90% of an anticipated $48 billion in worldwide data center mergers and acquisitions last year, or around $44 billion. This is an increase from 66% of a record $49 billion in such global M&A deals in 2021.

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A variety of technology, infrastructure, and commercial real estate investors made up the private equity buyers, who were supported by pension funds, sovereign-wealth funds, and family offices.

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Data centers are large warehouse-like buildings where clients, ranging from small enterprises to enormous cloud computing providers, rent space in networks of computer servers. Leaders in the cloud industry like Amazon.com Inc. and Microsoft Corp. run their own data centers, but they also rent space from other facilities to expand their reach in certain areas.          

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Data centers serve as the foundational infrastructure for cloud-based digital technologies, supporting everything from video streaming and online gaming to enterprise applications for remote and in-office work, 5G networks, and Internet-of-Things networks. According to John Dinsdale, the chief analyst and research director at Synergy, "These are long-term tendencies." According to him, "all generate ever-increasing volumes of data and need ever-increasing data-center capacity."

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According to Synergy, private buyers were engaged in 10 of the 12 biggest data center acquisition agreements during the past year. There were 187 data center-related M&A deals completed last year, according to the report.

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In December, DigitalBridge Group Inc., a Boca Raton, Fla., private-equity firm, and investment services firm IFM Investors closed an $11 billion acquisition of Dallas-based data-center operator Switch Inc.

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In announcing the deal, DigitalBridge Senior Managing Director Jon Mauck said the firm planned to “scale Switch’s business domestically and internationally to meet the robust enterprise demand.” Switch has set a goal of building more than 11 million additional square feet of capacity through 2030.

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Data center operator CyrusOne Inc. was purchased for $15 billion by New York-based private equity firm KKR & Co. and infrastructure investment company Global Infrastructure Partners in March of last year. CyrusOne, a Dallas-based company, runs more than 50 data centers across Europe, South America, and North America.

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Jon Lin, executive vice president and general manager of data-center services at Equinix Inc., which manages more than 245 data centers globally and is one of the largest listed data-center companies by market value, said, "These are really significant agreements and big cheques."

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Even as facilities financed by private equity are putting additional pressure on Equinix, Mr. Lin claimed that demand for data-center space is quickly catching up with supply as businesses across industries move more of their technological stacks to the cloud—a move accelerated by the Covid-19 outbreak.

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Pat Lynch, executive managing director and head of global consulting and transaction services for CBRE's data center solutions, predicted that investors would give operators the expansion money they need to capitalize on the soaring demand.

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Big hyperscale and social media businesses' continuous and vigorous use of data center capacity is definitely attracting large private equity investors, according to Mr. Lynch. He added that in addition to cost increases, additional expansion hindrances include power supply restrictions and persistent supply-chain delays.