Growth of the data centre market: Key M&A trends

Data centres are already part of our critical infrastructure, arguably as essential as roads and airports. The continued expansion of the digital economy and digitisation more generally have meant continued growth in demand for data centres. Advancements in artificial intelligence, life sciences and high-performance computing are expected to increase future demand even further. Vacancy rates are already very low and large corporations are struggling to secure data centre capacity, resulting in the requirement for increased supply and, in turn, new investment opportunities. 

However, providing the requisite supply of data centre space is not without its challenges, largely due to the need for efficient power and water management, grid congestion, planning/zoning requirements, the quest for optimal locations, sourcing skilled personnel and mounting construction and operation costs. Given the land, zoning and power constraints being experienced in several Tier 1 data centre markets, we are seeing increased interest and activity in Tier 2 and 3 markets, As a result, investors need to stay informed and ahead of the trends in the market, in order to capitalise on opportunities in the sector and manage exposure to potential risks.

As we enter 2025, we anticipate that the data centre market will continue to grow and we expect to see the following key trends emerge:

Power supply

In the case of data centres, the main obstacle to growth is power supply – hyperscale and colocation data centres jostle for space near large populations, but are very energy intensive and the ability to source power at any given location often inhibits development. Continuing moratoriums on grid connection agreements in cities such as Amsterdam and Dublin and also capacity shortages in the grid networks continue to persist, with developers turning to on-site power generation and/or gas networks as an alternative.

Another current issue is that there are shortages of supply of certain components that are needed for grid connection, for example transformers and other substation equipment. The sustainability of this power supply is also becoming an increasing concern, which compounds the problem. Earlier this year, the European Commission adopted a regulation, which is based on the European Energy Efficiency Directive1 and introduced a reporting scheme to rate the sustainability of data centres with power demand of at least 500KW2. It is to be expected that the European Commission will eventually define mandatory sustainability targets on the basis of the information obtained from data centre operators. Certain EU countries, such as Germany, have also already implemented binding targets, for example for the share of power supply from renewable energies, without being obliged to do so under European law. We may also see an increase in secondary acquisitions, such as the recently announced Equinix acquisition of two existing BT data centres in Dublin (expected to complete in H1 2025). External challenges aside, Investors and customers continue to push for improved ESG credentials and so we will expect to see continued use of renewable power generation and more power efficient technologies and smarter operations software in new data centre builds. We expect that this will lead to continued growth of investment and M&A in such sectors. One source of power being explored is the use of small modular nuclear reactors (SMRs), as indicated by Google’s recent agreement with Kairos Power which aims to bring SMRs into use by 2030. This is, of course, subject to some regulatory and logistical challenge – depending on the general attitude towards nuclear power in the relevant market, it may be difficult to obtain regulatory and/or local planning consent. 

M&A activity

Despite the power challenge, it is undeniable that the sector’s fundamentals remain attractive to investors; and the industry will require significant capital expenditure in the years ahead.

Data from Synergy Research Group shows that half-way through 2024, the value of total data centre deals closed globally was already at USD 36.7 billion, with another USD 7.1 billion agreed but not formally closed and an anticipated pipeline of over USD 20 billion in possible future deals. Much of this data comes from acquisitions, but also include equity investments, joint ventures, and single asset and real estate transactions.

Another notable trend which we expect to continue has been the increasing level of private equity involvement – in 2020 private equity accounted for 54 per cent of the value of closed deals, but this has increased to 85-90 per cent according to Synergy Research Group. The total fundraising volume for data centre vehicles was almost 40 per cent higher at the end of Q2 2024 (standing at USD 6.4 billion) than the full-year figure for 2023 and this trend is clearly set to continue due to continued demand, steady returns and significant growth and exit opportunities.

As investors compete for potentially lucrative data centre investment opportunities, some might look further afield to adjacent sectors, and we therefore expect to see increased activity in such sectors. For example, as data centres pivot towards AI, we also expect to see increased interest in dark fibre networks (particularly as redundancy fibre path requirements and expectations increase) and the virtualisation of network infrastructure.

Yieldcos

Financing for significant data centre capital expenditure requirements has traditionally been raised through the debt and direct equity markets, but the increasing demand for capital is leading to new sources of financing. Data centre “yieldcos” are one such avenue that we expect to see more of in 2025. Operating data centres with hyperscale or enterprise customers will have a stable and foreseeable revenue stream with long term customer contracts (often 10 or 15 years with additional  renewal periods) and a good track history and low risk of customer termination. Such stable revenue generating data centre assets can be hived out into a yieldco special purpose vehicle which investors can then acquire (in whole or part), with the original operator continuing to provide services via a management agreement. This will attract a new type of investor looking for stable low risk returns and allow traditional investors to deploy capital elsewhere in higher return assets. It may be that we also see hyperscalers divesting more of their own data centre assets to yieldcos, in order to release capital.

M&A financing

Whilst there is an ever-continuing demand for data centre supply, bringing significant equity investment into the sector, portfolio buyouts remain relatively rare, and as such the M&A financing market in this regard is narrow. Significant deals have occurred, such as Blackstone securing funding to support its acquisition of Airtrunk, however the debt market in relation to datacentres remains focused on capex financing for new developments as well as portfolio financings to fund development and operational expenditure. We also expect to see further ABS issuances across Europe by datacentre operators during 2025, following Vantage successfully launching the first public deal in the sector during 2024.