Digital infrastructure – and especially data centres – is probably the hottest thematic in infrastructure investing currently.
In Australia the sector has been having something of a ‘moment’ in recent weeks following the sale of AirTrunk to a Blackstone-led consortium in a deal worth north of A$24 billion ($16.1 billion; €14.6 billion) – a result that has the potential to re-rate valuations in the entire sector upwards for the foreseeable future.
And while AirTrunk is the most prominent recent example of just how hyped data centre assets have become, securing a standout exit for backers Macquarie Asset Management and PSP Investments, there are plenty of other managers and investors working away quietly on building large-scale platforms of their own in the space.
One such example is Brookfield Asset Management, which began building its portfolio of data centre assets around seven years ago, as Udhay Mathialagan, managing partner in the firm’s Infrastructure Group and CEO of its Global Data Centre Group, explains to Infrastructure Investor at its offices in Sydney.
Brookfield has developed six separate platforms within its global data centre business: US-based hyperscaler Compass; US retail colocation brand Centersquare; South America-focused hyperscaler Ascenty; European data centre operator Data4; three-way Indian joint venture Digital Connexion; and pan-Asia platform DCI Data Centers.
“They’re very regionally focused,” says Mathialagan, which is by design. “Scale is becoming more and more important in the way one plays the data centre market, and there are different ways to achieve that. There are a whole bunch of players who operate single buildings or a cluster of a few buildings, for example.
“But our view is that a lot of things have to come together to achieve real scale. One is the ability to build very large facilities, as to be a consequential player for the hyperscalers you really need to be talking about campuses, not buildings.”
This in turn means significant upfront (and ongoing) capital expenditure will be required – leading to what Mathialagan foresees will be a bifurcation in the market.
“There will be a top tier, or a first division, and then there will be other sorts of niches or regional players. In that first division will be the players who can put tens of billions of dollars to work. If you just stick with the western hyperscalers, they are all talking about how AI has lit a fire under them in terms of the infrastructure they need to secure. And only those first-division players will be able to keep pace with that procurement.”
On top of this, the biggest hyperscale customers aren’t certain what they will even require in five years’ time, Mathialagan says, meaning that these assets are not “just buildings” and require a certain kind of design philosophy that will allow them to be upgraded and altered over time.
Real estate or infrastructure?
Brookfield, of course, is one of the world’s largest real estate asset managers as well as being one of the biggest players in infrastructure – and data centres have always sat at a crossroads between the two asset classes.
This was illustrated most clearly with the aforementioned AirTrunk deal, where Blackstone deployed capital from both infrastructure and real estate funds (as well as private equity vehicles) to finance the transaction.
We are speaking with Mathialagan the week before the announcement of AirTrunk’s sale was made, but the way he outlines Brookfield’s thinking on this type of asset has echoed.
“There are two different lenses you can bring to this,” he says.
“The first is an operational lens. Does it behave like a real estate business or an infrastructure asset? But the second is an investor lens: what is the risk-reward?
“So reasonable people can arrive at different places, but to me, from an operational perspective it is becoming increasingly clear that if you’re operating a hyperscale campus, then it is quite a complex and technical piece of infrastructure. It’s not just a case of putting up simple office buildings – there are a lot of moving parts.”
Despite this, Mathialagan says that Brookfield does feel its real estate expertise has something to offer.
“There are still development risks, like construction risk, supply chain, financing, access to power, etc. So although there is some technical operational capability required commercially, the project can end up quite stable, and be seen as a core asset whether in real estate or infrastructure. That means we are starting to see more interesting capital structures, which is great from the infrastructure or real estate investor perspectives.
“You can now participate in the data centre game at various different points. If you want to be a developer and be a serious long-term holder of these assets, you can play in the infrastructure space. But there are also lots of data centre companies, including ourselves, who are looking at capital recycling opportunities and ways to settle down stabilised assets, which can fit very nicely into real estate pools as well.”
‘Increasing prominence’
As for future growth, Mathialagan says Brookfield is not finished – and that while the firm is now represented in all the key regions with its data centre platforms, there are more markets it is looking to expand into over time, particularly with its Asia-Pacific platforms. He cites the Middle East also as one market that the firm has not yet covered.
Mathialagan declined to comment on whether the firm might look to raise a dedicated digital infrastructure fund at some point, but it is clear that the thematic is important to the business.
“Digital has become an increasingly important part of our infrastructure strategy, and is something that has a strong connection to other parts of our product strategies like renewable energy and transition investing. The digital infrastructure theme will continue to be important across the board and will therefore have a greater and increasing prominence across several of our fund strategies,” Mathialagan says.
Ultimately, of course, Brookfield will be guided by what investors are keen to get exposure to in order to secure strong risk-adjusted returns – with no real signs that data centres will falter on that front any time soon.
“When you start unpeeling that real estate versus infrastructure dynamic, and rearrange that to place the investments on a risk-reward spectrum, you can see a lot of LPs are on a journey already, and some of them are super sophisticated and know where they want to play.
“But others are newer and are probably still figuring that out. Do they want to take development risk and push for a mid-teens-plus IRR, or are they happier to play in the more stabilised part of the sector?”
Data centres continue to present as that elusive type of asset, then, which can be shaped to offer investors whatever they are looking for. The AI and broader digitalisation trends mean that is likely to the case for a while at least.