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Part 2: Data Center Series

💰 The compelling case for data center investments.


In this three-part series we will examine the data center investment thesis and its impact on emerging market real estate investors. The parts are:

Types of Data Centers

There are three ways for an enterprise to maintain data and they include: on site (i.e., enterprises), co-location, and in the cloud (i.e., hyperscalers).

  1. Enterprises maintain their data on their premises and have their own IT department, cyber security, software and servers which they maintain.

  2. Co-location data centers, on the other hand, allocate server space at their facility for multiple clients and maintain all the equipment and ensure the data center is properly cooled and has access to adequate levels of electricity. This is the category of data centers which investors and private equity primarily invest.

  3. Hyperscalers are the large cloud platforms (e.g., Azure, AWS, Google Cloud, Salesforce) which host enterprises in the cloud and those servers are at a location owned and maintained by the hyperscaler. Many hyperscalers opt to outsource some of their data needs to co-location data centers. In those situations, the hyperscaler is a tenant in the co-location facility.

The McKinsey chart below indicates the incredible growth in demand there has been since 2014 for new data center capacity. Enterprises are losing ground to hyperscalers, and co-location data centers are projected to remain relatively consistent in terms of their overall market share.

Chart showing data center capacity
Investment Thesis

Investing into data centers has been a powerful investment theme over the past decade, with investments escalating rapidly during, and following, the global quarantining of the healthy beginning in 2020. The government imposed lockdowns forced many to rely on the digital realm to make friends, work, and purchase goods and services. The result was an explosion in digital processing demand which many investors believed represented a paradigm shift and a sign that humanity was ready to more fully embrace lives lived within the confines of the screens of laptops, smartphones and smartwatches. Proliferation of AI, autonomous vehicles, 5g and streaming buoyed the optimism.

Internet Traffic and Data Center Energy Use (2010 – 2020)
Internet Traffic and Data Center Energy Use (2010 – 2020)

Data center investors believe they can achieve high returns by investing into this general theme of growing demand of cloud and digital content usage. Data centers offer a fairly straightforward way to invest into that theme, with relatively predictable cash flows and projected volatility. Leases in data centers are usually long-term in duration, and characterized by low churn. Future demand is expected to be bolstered from international expansion. Virtually all of the data centers are currently in advanced countries, but many more are expected globally in order that data be closer to the end users.

Number of data centers by country

According to Synergy Research Group, in 2021, there were 209 data center deals worth more than $48 billion, up 40% from 2020. From 2015 to 2018, 42% of data center deals involved private equity buyers. This share increased to 65% from 2019 to 2021, and to more than 90% in the first half of 2022. The largest such deal in 2022 was the $15 billion acquisition of CyrusOne by KKR and Global Infrastructure partners.

Data center M&A and Private Equity Activity
Data center M&A and Private Equity Activity
Data Center Landscape in LATAM & Africa

Brazil has the most data center capacity in the region with over a 33% market share. In Latin America, the telecoms are the primary holders of data centers, followed by private capital investors (e.g., REITs, private equity, LBO firms) and then the hyperscalers. Mexico grew at the fastest rate in the world in 2022 adding 20% to its data center capacity. Brazil and Mexico are expected to be the fastest growing data centers markets in Latin America, over the next five years.

Ascenty is Latin America’s largest data center provider with 34 data centers in Brazil, Chile, Mexico and Colombia. These installations represent more than 5,000 MW of capacity, across 30 cities, and 3,000 properties. Most of the company’s development activity has occurred in the last five years. In 2019, Ascenty was purchased by Digital Realty Trust and Brookfield for $1.8 billion at a cap rate estimated to be in the mid-single digits. In 2021, Ascenty raised $925 million in credit to build five data centers in Sao Paulo. The debt syndication was led by Citibank, ING, Itau Natixis, and Scotia Bank.

Macquarie Group, through Aligned Data Centers, purchased ODATA from Patria Investments at the end of 2022 for an estimated $1.96 billion. The transaction paved the way for the institutional investor’s entry into the Latin America data center market. Macquarie plans to inject an additional $1 billion of capital to expand its presence in Brazil, Mexico, Colombia and Chile.

The Mexico Data Center Association expects $8.5 billion of investment in new power generation capacity, mostly in the Bajio region of Mexico, to serve new data centers in the pipeline. The expected investment translates into 600 MW to 800 MW of additional data center capacity. Expected investments to build data center properties should top $905 million between 2022 and 2026. The region already has ten data centers and is expecting eighteen new projects. Microsoft is responsible for one of the new projects which will be the company’s first data center in Spanish-speaking Latin America, and the 62nd largest in the world.

Africa has had success attracting data center investment capital, and in January 2023 Convergence announced a fund closing of $296 million, and Teraco an additional $680 million. $1 billion in one month, into a single asset class, is huge news for Africa.




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