Keeping Pace with the Surge of AI-Driven Data Center Financing and Property Investment

As the tidal wave of expected generative AI demand unleashes a flood of new data and capacity requirements, the first weeks of the new year (and the months leading up to it) have seen an astonishing surge of announcements for data center and digital infrastructure industry financing and property investment.

The trick for journalists in the industry's current, staggering climate of AI-driven data center financing news is knowing that, like waves lining up to crash on a beach at high tide, the next big announcement is incoming, just over the horizon.  

Centrally however, recent insights from Compass Datacenters SVP Jonathan Schildkraut (who prior to working with CyrusOne and Compass, spent years as a Wall Street analyst) illuminate a core trend - or rather, two -- driving the present amount of investment in data centers and digital infrastructure.  

In his new blog, Schildkraut says he now discerns "an incredibly unique convergence of two data center investment trends." He adds, "Specifically, we are seeing improving returns on capital at the same time as the risk associated with capital deployment is falling."

"More capital than ever before, 70-85% of expected spend, is being deployed while attached to known and committed demand," Schildkraur writes. "Said another way, industry participants are developing new facilities with the lowest level of 'at risk' capital the industry has ever experienced."

Schildkraut's analysis adds, "Investors understand the provision of capital demands a certain return to be attracted to an investment. The higher the risk associated with the investment, the higher the required return to clear the investment threshold. Yet, in today’s market, we are getting two things at once – lower risk exposure and higher returns on capital invested."

BlackRock Acquires GIP

BlackRock's move to acquire its fellow, mega- independent infrastructure fund manager Global Infrastructure Partners (GIP) has to be viewed in the context of the present AI-driven expansion of data center stakes. 

On Jan. 12, the parties announced their entry into an agreement for BlackRock to acquire GIP for total consideration of $3 billion in cash and approximately 12 million shares of BlackRock common stock.

BlackRock said the transaction "creates a multi-asset class infrastructure investing platform with combined client assets under management of over $150 billion across equity, debt and solutions, and strengthens deal flow and co-investment opportunities" for both firms.

GIP is one of the world’s largest infrastructure funds, managing more than $100 billion in assets from offices in major global financial capitals.  

Infrastructure funds typically invest in large projects with predictable returns, such as airports, ports and energy generation – which are all well represented in GIP’s portfolio. In recent years, these funds have taken an increasing interest in the strong returns available in digital infrastructure, which fits their model for a capital-intensive sector. 

In 2021, GIP partnered with co-investment giant KKR (lately seen plowing investment into Asia-Pacific's data centers behind the ongoing AI boom) to acquire build-to-suit, wholesale data center provider CyrusOne. 

As noted by BlackRock in laying out its reasons for the GIP aquisition: 

"Representing a $1 trillion market today, infrastructure is forecast to be one of the fastest growing segments of private markets in the years ahead. A number of long-term structural trends support an acceleration in infrastructure investment. These include increasing global demand for upgraded digital infrastructure like fiber broadband, cell towers and data centers; renewed investment in logistical hubs such as airports, railroads and shipping ports as supply chains are rewired; and a movement toward decarbonization and energy security in many parts of the world."

Further down in its press release announcing the news, BlackRock points out that large government deficits mean that the mobilization of capital through public-private partnerships will be critical for funding important infrastructure. 

The investment firm also pointed out tht as capital has become more scarce in a higher interest rate environment, "companies are exploring partnership opportunities for their embedded infrastructure assets to improve their returns on invested capital or to raise capital to reinvest in their core businesses."

BlackRock added:

Marrying the proprietary origination and business improvement capabilities of GIP and BlackRock’s global corporate and sovereign relationships provides a platform for diversified, large-scale sourcing to support deal flow and co-investment opportunities for clients. We believe bringing GIP and BlackRock together will deliver to clients the benefits of broader origination and business improvement capabilities.

The GIP management team, led by Bayo Ogunlesi, GIP Founding Partner, Chairman, and CEO, along with four of the firm's founding partners, is slated to lead the combined infrastructure platform. BlackRock also agreed to appoint Ogunlesi to its board of directors at the company's next regularly scheduled board meeting, following the closing of the transaction.

Laurence D. Fink, BlackRock's Chairman and CEO, commented:

“Infrastructure is one of the most exciting long-term investment opportunities, as a number of structural shifts re-shape the global economy. We believe the expansion of both physical and digital infrastructure will continue to accelerate, as governments prioritize self-sufficiency and security through increased domestic industrial capacity, energy independence, and onshoring or near-shoring of critical sectors. Policymakers are only just beginning to implement once-in-a-generation financial incentives for new infrastructure technologies and projects [...] 

We founded BlackRock 35 years ago based on a unique understanding of investment risk and the factors and forces driving investment returns. GIP’s deep understanding of the factors and forces driving operational efficiency for long-term value creation have made them a global leader in infrastructure investing. Bringing these two firms together will create the infrastructure platform to deliver best-in-class investment opportunities for clients globally, and we couldn’t be more excited about the opportunities ahead of us.”

"Global corporates have turned to private infrastructure as a fast innovator and a more commercially agile owner of infrastructure assets that aren't core to their commercial businesses,” concluded GIP's Ogunlesi. "This platform is set to be the preeminent, one-stop infrastructure solutions provider for global corporates and the public sector, mobilizing long-term private capital through long-standing firm relationships. We are convinced that together we can create the world’s premier infrastructure investment firm.”

DigitalBridge, Silver Lake Raise Stakes In Vantage Data Centers 

Huge new financing for Vantage Data Centers, backed by existing investors DigitalBridge and Silver Lake, was noted by no less a financial authority than the Wall Street Journal to ring in 2024. WSJ assessed that the the two investment firms buying stakes in Vantage for such a high valuation was an unerring signal that the AI boom is having deep reverberations in the world of infrastructure financing.

On Jan. 9, Vantage Data Centers' long term partner DigitalBridge, just days out from its formation of an AI computing alliance with Intel, and former partner Silver Lake Partners announced that they've joined forces to provide $6.4 billion of equity funding to fuel the data center operator's next phase of growth across North America and EMEA.

A press release noted that with the new financing, aggregate new equity investment in the data center operator over recent months reaches $8 billion, accelerating and extending Vantage’s capabilities as strategic partner to global hyperscalers to meet unprecedented cloud and AI demand. 

The equity round will support a development investment of over $30 billion to deliver more than 3 gigawatts (!) of additional data center capacity.  

"This massive investment will enable over 3GW of expansion capacity, allowing us to better serve customers' cloud and AI requirements," said Sureel Choksi, President and CEO of Vantage Data Centers.

Vantage Data Centers, which started with a single site in Santa Clara, California represents an amazing growth story in digital infrastructure. The combined new investments highlight the long-term commitment of the two investors to the business. 

Silver Lake launched Vantage in 2010 as a single data center campus in Santa Clara, and recruited the management team that continues to lead Vantage today. Silver Lake grew the company to have one of the largest wholesale data center footprints in Silicon Valley, focused on serving sophisticated technology companies. 

“We are proud of what we pioneered when we launched Vantage, and we are thrilled to invest and partner again with this exceptional management team alongside DigitalBridge to drive the next generation of energy-efficient, hyperscale data center leadership,” said Greg Mondre, co-CEO and managing partner, and Lee Wittlinger, managing director, of Silver Lake, who added, “Silver Lake is committed to bringing to bear the depth and breadth of our specialized expertise across the technology landscape to strengthen Vantage’s partnerships with the world’s biggest and most sophisticated technology companies and continue to meet their most challenging data center needs.”

A DigitalBridge-managed vehicle acquired Vantage in 2017, and has been its key strategic partner for nearly seven years, further emphasizing the company’s strategy to support cloud, and now AI, adoption, while scaling Vantage into its present global footprint, involving 32 operational or developing hyperscale data center campuses across five continents.

“We are excited about supporting the next chapter of Vantage’s growth in partnership with Silver Lake,” said Jon Mauck, senior managing director at DigitalBridge, who leads the company’s data center investment strategy.

Mauck added, “We believe the combination of DigitalBridge’s unparalleled insight into the digital infrastructure landscape and Silver Lake’s technology focus creates a unique partnership to further enable Vantage’s strategic expansion and long-term growth plan. Vantage is a critical partner to the leading cloud and technology platforms globally, and is well positioned to continue to support accelerating adoption of cloud- and AI-based technologies.”

The new investment from DigitalBridge and Silver Lake follows several years of record growth at Vantage, and will be a key enabler of the business’ strategic growth and investment plan to meet customer demand. Vantage owns or controls 25 sites in North America and EMEA, totaling more than three gigawatts of expected capacity. As part of the company’s investment plan, Vantage’s strategic land bank is expected to drive an estimated $30 billion of additional development.

In connection with the new investment, Vantage said it will continue its development of next-generation data centers, including energy-efficient and sustainable designs purpose-built for AI and large-scale cloud deployments. The new transactions are expected to close in the first quarter of 2024, subject to customary closing conditions.

“Cloud computing, AI and related technologies are driving unprecedented demand for digital infrastructure," said Vantage Data Centers' president and CEO, Choksi. "The market opportunity in front of us is extraordinary, and we are excited to chart our next phase of growth with two premier investors who have been great partners to us and have an unmatched understanding of our global technology customers and their infrastructure needs.”

As a footnote to the larger equity annnouncement, on Jan. 10, lead investor DigitalBridge announced that it had completed its deconsolidation of Vantage SDC (Stabilized Data Centers), a portfolio of 13 hyperscale data centers serving four North American markets, previously managed and operated by Vantage Data Centers.

In characterizing this move, Marc Ganzi, CEO of DigitalBridge, commented:

“I am pleased to report that today we are a pure-play alternative asset manager, fully aligned with our investment partners to drive long-term returns powered by the secular demand for digital infrastructure and our history of building value in the sector. With the deconsolidation of Vantage SDC, we achieved a key 2023 objective, simplifying our business profile and reporting structure, while continuing to maintain financial exposure to Vantage SDC’s high-quality data center assets serving key power-constrained North American markets.”

EdgeCore Announces $1.9B Debt Financing to Fund Mesa Data Center Campus Development

For its part, on Jan 4., Denver-based wholesale data center developer, owner and operator EdgeCore Digital Infrastructure announced the completion of a $1.9 billion debt financing transaction to fund scalable development on its flagship data center campus in Mesa, Arizona. 

The data center operator noted that this transaction represents the company's inaugural Green Loan and supports its commitment to sustainable business practices. The company added that the move provides a template for several planned financings across the EdgeCore portfolio and was conducted in conjunction with its owner, Partners Group, a global private market firm acting on behalf of its clients.

At full build-out, EdgeCore's LEED-designed, water-neutral campus in Mesa will be capable of supporting a minimum of 450 MW of critical load, and will be engineered to meet current and future customer requirements across 3.1+ million square feet of space.

The campus currently has one operational data center and two additional data centers under construction totaling 206 MW of critical load capacity.

"The development of scalable data center campuses designed to support the density requirements of hyperscalers is EdgeCore's sole focus, and one that we address with sustainable construction, operations and business practices in mind," said Julie Brewer, SVP of Finance, EdgeCore Digital Infrastructure. "To this end, our Phoenix data center campus in Mesa, Arizona is being developed using debt financing from this Green Loan."

Temperature regulation at EdgeCore's campus in Mesa utilizes an air-cooled design with an ultra-efficient closed-loop chilled water system, allowing the company to achieve a benchmark water usage effectiveness (WUE) rating of nearly zero, and a power usage effectiveness (PUE) rating far below the industry average of around 1.50. 

As a result of these energy efficiency and sustainable water management features, financing for the project was structured as a Green Loan in alignment with the latest Green Loan Principles as published by the Loan Market Association, Asia Pacific Loan Market Association and the Loan Syndications & Trading Association and with ING Capital LLC as the sole Green Loan Structuring Agent.

In November 2022, EdgeCore was acquired by Partners Group with their pledge to invest up to $1.2 billion to fund the acquisition and buildout of existing and future data center sites. EdgeCore utilized Partners Group's initial capital commitment throughout 2023 to expand and begin development of data center campuses in Santa Clara, California (January 2023); Ashburn, Virginia (March); Mesa, Arizona (April) and Reno, Nevada (August 2023).

Fentress Boyse, Member of Management, Private Infrastructure Americas, Partners Group, commented:

"The construction financing for the Mesa campus is an important milestone for EdgeCore. This represents the first of many financings EdgeCore will pursue to support its ambitious capital plans and customers' needs. The broad participation and strong demand from the banking partners associated with this financing is a validation of EdgeCore's differentiated approach and bright future. This financing also represents the largest Green Loan by a Partners Group portfolio company to date."

As recounted by a press release, EdgeCore's $1.9 billion debt financing is comprised of a limited-recourse senior secured term loan, a revolving senior secured letter of credit facility, and an accordion feature that will fund future development. The transaction was led by a consortium of coordinating lead arrangers including MUFG, TD Securities, ING Capital LLC, Scotia Bank, and Santander. 

Stack Infrastructure's November Financing Round Tees Up January AI Platform Launch

Last November, Denver-based global developer and operator of data centers Stack Infrastructure announced the issuance of $290 million in securitized notes at a fixed interest rate coupon of 5.900%. The announcement marked Stack’s third structured debt financing of 2023 and seventh since 2019. 

Stack noted it has cumulatively raised $2.59 billion in Notes, rated “A-” by Standard & Poor’s, via its master trust program.

Over the past several years, the company has made a habit of lining up low-cost capital to fund the growth of its data center footprint through its use of securitization financing, in which a company creates a security based on the creditworthiness of a specific pool of assets, rather than the entire company. 

“Stack’s continued success in raising capital via the ABS [asset backed securities] market is evidence that investors recognize the success of our cloud-first approach and cutting-edge capacity in key markets,” said Cameron Parker, Vice President, Treasurer at Stack Americas. “Our growth strategy is intrinsically aligned with our clients’ goals, ensuring the essential AI-ready capacity they require while consistently adapting to their evolving needs.”

With the increasing demand for high-density data center capacity, Stack’s extensive footpring, utilizing a proven AI-ready data center design, continues to expand, encompasses an impressive 2.5+GW built or under development and an additional 4.0+GW of planned and potential development. 

Stack's recent worldwide developments include AI-scale campuses offering hundreds of megawatts in major data center markets, including Northern Virginia, Phoenix, Toronto, New Albany, Portland, Osaka, Stockholm, Tokyo, and elsewhere.

The funding announcement set the table for Stack's January 8 announcement of an expansion of its AI-ready data center capabilities to support machine learning and related high-density workloads.

“Stack was built for the world’s largest innovators, and from the beginning, we have prioritized the long-term scalability of our clients with a flexible data center design,” said Matt VanderZanden, Chief Operating Officer of Stack Americas. “As an AI-Ready digital infrastructure company with a proven track record of high-density deployments, Stack is building upon this foundation to continually address evolving client needs.”

Stack contends that its portfolio of operating data centers, designed based on cost-efficient and proven models, exemplifies the company's ability to swiftly deliver gigawatts of scale, coupled with expertise in cooling systems enabling expanded deployment densities, tailored for sustained growth in the age of AI.

The operator notes that it achieves optimal cooling for high-density AI workloads through its closed-loop water cooling systems, offering flexibility to meet diverse cooling requirements, including customizable platforms supporting up to 30 kW per rack with traditional air cooling; up to 50 kW per rack with rear door heat exchangers; up to 100 kW per rack with direct-to-chip liquid cooling; and up to and exceeding 300+kW per rack with future immersion cooling. 

With 2.5+GW built or under development and an additional 4.0+GW of planned and potential development pm campuses spanning major data center markets in the Americas, EMEA, and APAC regions, Stack strategically supports the hyperscale requirements global technology firms through the growth of AI-ready campus developments.

Notable examples include:

• A planned five-building data center campus offering 250 MW of scale in Central Phoenix with a dedicated on-site substation.
• A 48 MW Santa Clara data center, featuring immediately available shell space powered by an onsite substation with rare contracted capacity.
• A 56 MW Toronto campus, spanning 19 acres, includes an existing 8 MW data center and 48 MW expansion capacity, all supported by committed power.
• A 48 MW build-to-suit opportunity in the Dallas/Fort-Worth area, boasting abundant power and connectivity options.
• A 200 MW campus in Portland spanning 55 acres with 96 MW currently available for leasing.
• A New Albany, Ohio 58 MW data center campus with immediately available capacity and build-to-suit expansion opportunities.
• A strategically located data center campus in Osaka, Japan with 72 MW of capacity across three planned buildings.
• A 36 MW facility delivered in Australia, launching a 72 MW campus in Melbourne, one of the fastest growing markets in Asia Pacific.
• A 30 MW data center campus in Stockholm with 18 MW under development.

First Citizens Bank Arranges $345 Million Financing for DataBank's Atlanta Data Center

Last December, First Citizens Bank announced that its Technology, Media and Telecommunications Finance business served as lead arranger of $345 million in financing on behalf of DataBank, for the construction of that operator's new hyperscale data center in the Atlanta, Georgia area.

As a top U.S. provider of enterprise-class edge colocation, interconnection, and managed cloud services, DataBank said it is expanding its data center capacity to meet the burgeoning demand for artificial intelligence applications.

"This new financing will allow us to continue bringing important capacity to market to meet extremely high demand for data center space and power," said Kevin Ooley, DataBank's President & CFO. "We appreciated the agility and expertise of the First Citizens Bank team in making this financing a reality."

DataBank's new ATL4 facility, located 20 minutes outside of downtown Atlanta, is a single-tenant, fully leased data center that will be supported with renewable power. The facility is expected to open in Q3 2024.

First Citizens' Technology, Media and Telecommunications Finance team provides cash flow and asset based senior debt for communications and technology companies in the middle market throughout the U.S.

"It was a pleasure to leverage our structuring expertise to support DataBank with the financing necessary to meet their customer-driven capital requirements," said Jeremy Wolfe, a managing director who led the First Citizens banking team on the transaction. "We look forward to continuing to work closely with them on future projects."

Last December, DataBank was also seen preparing to purchase an 85-acre site in Culpeper, Virginia for construction of a future data center campus.

Flexential Caps Off Impressive 2023

Finally (for now), in a recent LinkedIn blog assessing his company's financial performance over the past year, Chris Downie, CEO of Flexential, reported:  "In 2023, we surpassed our booking targets for the year achieving 124% of plan, significantly increased new logo sales, up nearly 200% YoY, and we added over 200 customers to our roster. 2023 revenue and earnings exceeded our plans, up ~15%, and ~28%, respectively, marking a historic accomplishment for Flexential."
 
Downie noted that Flexential also made significant strides in its financing and investment programs in 2023. Through multiple Asset-Backed Securities (ABS) offerings in 2022 and 2023, he said that Flexential secured $500 million in additional capital, facilitated by increased earnings and the integration of specific data centers into the company's financing framework. 

"For this additional funding, we adhered to our Green Bond Principles, in line with our initial Green Bond issuance under the ABS format in 2021," noted Flexential's Downie. "This new capital enabled us to sustainably expand our data center investment initiatives, and in 2023, we invested over $400 million to enhance our infrastructure, reflecting our commitment to sustainable growth for the benefit of our clients, partners, and employees."

However, Flexential's CEO concluded that the most exciting development he saw for last year resides in the new, groundbreaking cycle the data center industry is entering.

"With AI and other rapid technology advancements reshaping the industry, modern data centers have become crucial in enabling hybrid IT environments for our customers," said Downie. "We are at the edge of a revolutionary phase where our expertise and infrastructure are more vital than ever."

Laurel Durkay, head of global listed real assets at Morgan Stanley, recently joined CNBC's 'The Exchange' to discuss the potential demand for data centers driven by AI, and companies best positioned to face the demand.

Keep pace with the fast-moving world of data centers and cloud computing by connecting with Data Center Frontier on LinkedIn, following us on X/Twitter and Facebook, and signing up for our weekly newsletters using the form below.