While no sector is completely shielded from macroeconomic headwinds, the data centre industry benefits from secular and non-cyclical growth. Despite the challenging economic environment leading to increased caution among industry participants, the data centre sector has demonstrated resilience. Indeed, with its mission-critical role and strong customer dependency inherent to the sector, data centres appear well-positioned to weather future uncertainties.

In 2023, the global data centre M&A market experienced a slight decline in value, totalling $36.6bn compared to $44.6bn in 2022, marking an 18% decrease. This dip can be primarily attributed to the absence of large transactions surpassing $10bn, which were prevalent in previous years. In 2022, two significant M&A deals took place, preceded by three in 2021, significantly elevating the annual investment value to unprecedented heights. Last year, the largest investment was the $7bn joint venture between Blackstone and Digital Realty, aimed at developing four hyperscale data centre campuses across three metro areas spanning the American and European continents. Among other significant acquisitions, Brookfield Infrastructure and Ontario Teachers’ acquired Compass Datacenters from RedBird Capital Partners and Azrieli Group for $5.7bn, KKR purchased a 20% stake in Singtel’s Regional Data Centre Business in Asia valued at $5.7bn, and Brookfield acquired the European data centre portfolio Data4 from AXA IM for $3.8bn. 

The debt market slowdown has impacted high-value M&A transactions, yet there is a rising trend towards minority stakes and smaller deals. Hence, 26 M&A deals were transacted last year, against 22 in 2022 and 24 in 2021, witnessing the sector’s resilience. Data centres are increasingly perceived as secure long-term investments with strong potential returns (typically 10%+), leading to heightened sponsor interest. Private equity (PE) or PE-backed operators have dominated transactions since 2021, with private transactions taking some major data centre players out of the public market. Financial sponsors, including PE funds, real estate funds, and infrastructure investors, have been instrumental in the industry’s growth, providing both capital and strategic guidance.

Indeed, building and managing data centres involve substantial costs. Moreover, data centres require room to adapt to evolving server technologies, notably AI and prioritise energy efficiency in their designs. Predicting revenue growth proves challenging in certain markets, particularly at scales below 30 MW, making new schemes potentially economically unviable. Even hyperscalers, with their extensive capital expenditure capabilities, encounter hurdles in expanding their fleets as they cannot swiftly establish a presence everywhere whilst they need to expand to meet the required scale to achieve profitably. This pursuit of scale has led the industry to open up to private equity investments. 

Traditionally, infrastructure investors have been drawn to capital-intensive industries. Still, the substantial capital requirements are prompting larger operators to explore more creative funding ways at a time when capital is slightly less abundant. Consequently, consortium-based deals have become more common, albeit sometimes resulting in longer closure times. Another noteworthy trend recorded over the past 18 months is the increase in investments within the vertical data centre ecosystem, particularly in supply chain solutions such as innovative power solutions. This trend is driven by the growing global demand for utilities struggling to meet increasing data centre needs. 

Due to the long-term interest rate hike and the high cost of debt, prime data centre yields have softened slightly by approximately 50 to 70 basis points in the last 12 months. On average, in the major Western European data centre hubs, prime yields currently range between 5.0% and 6.0%. We expect prime yields will remain stable in the next six months, notably thanks to the expected decline in central bank rates across Europe, and may even harden toward the end of the year as strong competition between investors is likely to put upward pressure on pricing.

_{Read the articles within Spotlight: European Data Centres below.}