Private Equity Firms are taking over the data center market. The last few years have all shown the same thing in regards to data center investment: the market is being bought up by firms forming joint ventures with some of the largest publicly traded data center providers in the world.

Data centers are critical assets that allow for sustained growth in cloud services. Taking a temperature of the market one can see that there are a few mega trends that are driving up financial interest in data centers. The rapid acceleration of cloud computing, the growth of hyperscale operators, and data center operators’ need for geographic breadth all contribute to this being a unique period of time in the data center industry. Companies recognize that they need to increase their offerings while simultaneously increasing the amount of locations and markets that they’re operating in.

Public companies can’t make investments in all of those areas without stressing their financials. It appears as though investors in the market are all starting to come to this realization at about the same time as well. This constant need for more data center space is fueling private equity activity as investors look to benefit from high value and strategically placed data center assets.

Trends in Funding

In 2019 alone, private equity firms accounted for 80% of all data center acquisitions. In total, there were 105 deals that involved private equity firms purchasing data centers. This more than doubled the number of similar deals that were closed in 2017 and was four times as many deals that were closed in 2016. This upward trend has resulted in the value of acquisition deals reaching an all-time high. As the digital transformation continues it’s clear that investors are viewing data centers as a safe investing choice.

So, is this a good thing? Private equity firms have a well-deserved bad reputation of acquiring companies, sucking all of the profit out of them, and discarding the husks in an ever-growing trash heap of dead companies.

While that may ring true in other business sectors, the vast majority of these acquisitions and funding deals have shown that the private equity firms snatching up data centers or investing in them are looking to grow the business they acquire. Given the high demand for cloud services and the fact that data centers are infrastructure driven businesses where you get out what you put in, this seems like an obvious business decision. The growth potential of the data center market feels limitless right now. Also, many data center businesses typically don’t have a lot of manpower or HQ’s so that means there is less overhead for a private equity firm to strip away to begin with.

Private equity investment in data centers

One big player in the data center sector, Digital Realty Trust, was formed back in 2004 when a private equity firm bought out 21 data centers. DRT has since grown into a leader in the industry with over 214 locations across the United States and Europe. In their case, private equity investment was a means to propel the organization to new heights.

Recently, Equinix announced a forthcoming major expansion of their hyperscale data center portfolio with Singapore’s GIC sovereign wealth fund providing $3.9 billion in funding. GIC has funded much of Equinix’s prior expansion in the hyperscale arena, having previsoulsy invested $3 billion in facilities recently completed in Japan and Europe.

This new influx of capital will allow Equinix to build 32 more hyperscale data centers in key locations around the world. Equinix has long been a global leader in the colocation and interconnection industry. This move allows them to instantly transform themselves into a formidable player in the hyperscale market, where single client deployments can take up entire buildings. Injections of capital from private equity firms have a habit of increasing the offerings of data center providers at astounding rates.

One of the largest deals announced so far this year was the acquisition of QTS by private equity firm Blackstone Group Inc. The deal was valued at roughly $10 billion, representing a 21 percent premium on the closing share price that QTS was listed at on the day of the acquisition. QTS operates data centers in North America and Europe with over 7 million square feet in colocation space available. Instead of looking to flip the company’s assets to turn a quick profit, the firm hopes to expand their footprint and services even further in an attempt to gobble up more of the ever-increasing colocation market share. This seems to be the blueprint for these types of acquisitions.

Bigger Deals on the Horizon

The last few years have shown us that private equity firms view data centers as one of the best ways to make money. The underlying strategy they’ve had in most of these deals is to pump funding into existing data center providers so that the acquired company can increase their market share, thus creating a healthy ROI for investors. We can expect the valuations of these types of funding deals and acquisitions to increase over time as data center services become more and more essential.

Due to the ongoing digital transformation, and the widespread adoption of working from home in the immediate wake of the covid-19 pandemic, the demand for cloud services and increases data storage will skyrocket in the years to come. This is good news for data center providers as trends indicate that data centers will serve as the fuel that propels this growth.