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Data Centers Are The Hottest Item In Private Equity

Over the past year, as the economy has grown more tepid, the number of mergers and acquisitions has fallen, but one area that has remained hot continues to be data centers. Last year almost saw a record for private equity purchases of data storage warehouses as the global economy has become more reliant on “the cloud.” 

According to McKinsey, “Data centers are typically owned and operated either by big companies (such as cloud vendors, banks, or telcos) for their own purposes or by co-location companies. The latter lease out the space and typically provide network capacity and power, as well as the cooling equipment that keeps down server temperatures. Tenants bring their own IT equipment. Data centers have attracted the interest of investors, often because of the steady, utility-like cash flows and risk-adjusted yields.1 In 2021, there were 209 data center deals, with an aggregate value of more than $48 billion, up some 40 percent from 2020, when the deals were worth $34 billion. In the first half of 2022, there were 87 deals, with an aggregate value of $24 billion. From 2015 to 2018, private equity buyers accounted for 42 percent of the deal value. Their share increased to 65 percent from 2019 to 2021 and to more than 90 percent in the first half of 2022.” 

The Wall Street Journal reports, “Private-equity firms last year accounted for more than 90% of an estimated $48 billion in global data-center mergers and acquisitions—or roughly $44 billion—up from 66% of a record $49 billion in such global M&A deals in 2021, according to market research firm Synergy Research Group.

Backed by pension funds, sovereign-wealth funds and family offices, the private-equity buyers included a mix of technology, infrastructure and commercial real-estate investors.

As the underlying infrastructure for cloud-based digital tools, data centers support everything from video streaming and online gaming to workplace and remote work enterprise software, 5G networks and Internet-of-Things systems. “These are long-term trends,” said John Dinsdale, Synergy’s chief analyst and research director. “All generate ever-greater amounts of data and need ever-greater data-center capacity,” he said. 

Over the past year, 10 of the 12 largest data-center acquisition deals involved private buyers, according to Synergy. All told, it said, there were 187 data-center-oriented M&A deals last year.

It’s not only private equity floating on cloud nine. Amazon has been one of the biggest movers and shakers in the industry when it comes to buying and expanding data centers. The Washington Post reported, “Amazon will spend $35 billion over the next two decades to expand its data center business across Virginia, the company announced Friday, adding at least 1,000 jobs to a lucrative industry that has been rapidly growing in the state’s northern suburbs.

If approved by Virginia lawmakers, the tech giant’s cloud-computing arm, Amazon Web Services (AWS), stands to receive up to $140 million in economic incentives from the state and as many as 15 years of additional tax breaks for equipment and software. (Amazon founder Jeff Bezos owns The Washington Post.)

The data center industry has in recent decades ballooned in Northern Virginia, which is home to about 275 data centers and handles at least a third of the world’s online use. Thanks to the region’s dense network connectivity, business-friendly policies and easy access to land and electricity, Ashburn has come to be known as “Data Center Alley.”

Many local officials have touted this growth, saying it increases local tax revenue without adding traffic or requiring much public infrastructure. Data centers, which act as a physical home for cloud computing, contain hundreds or thousands of computer servers in nondescript, highly secure buildings.”

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