Data centres have become one of the most critical assets of the digital age and form one of the key pillars in modern infrastructure investment. Once viewed as passive storage units, today they power everything from streaming services and mobile apps to cloud computing and generative AI and, in our uncertain world, underpin critical national security infrastructure.
At the heart of this new paradigm is a dramatic rise in computing needs. Lately driven by AI, but consistently supported by gaming, browsing, and mobile-first usage, the world’s demand for data is insatiable. Much of this growth is concentrated in mature markets, but a new wave is emerging in places like Africa, India and Southeast Asia, where users are skipping fixed-line infrastructure entirely and moving straight into digital-first ecosystems in order to power the innovative mobile banking and widespread flexible e-commerce that is becoming a hallmark in rapidly innovating emerging markets.
This explosion in demand has transformed data centres into complex, mission-critical environments that rely on advanced cooling, secure power systems and are pitched as having rock-solid resilience. As their role, and the full potential of the nascent AI technology expands, so too do the challenges and opportunities for private capital investors which we outline below.
Power, resilience and data sovereignty
As essential digital infrastructure, data centres are now attracting growing interest from investors seeking more than traditional project returns. Rather than simply focusing on data centres in static silos or one-off projects, investors can see enhanced earnings offered by entire data ecosystems. However, they must bear in mind three key issues: power, resilience and data sovereignty.
Power:
- Data centres require access to a consistent and secure source of power supply.
- In power-insecure markets, this means ensuring access to premium grids that are free from interruptions.
Resilience:
- Data centres are intensive, high-energy users that must be secure from perennial threats like fire and irritants like cyber threats.
- They must also be protected against political activism, terrorism and corporate espionage.
Sovereignty:
- Governments are demanding local data centres, as they increasingly classify them as critical national (and national security) infrastructure.
- This has driven a shift from globally-decentralised data centres to sovereign-controlled assets.
- At the same time the market, especially in Europe, is searching for opportunities for developments in jurisdictions that have more business friendly development rules even if those locations are located further away from population centres.
- There should be investor consideration of regulations and how the data hosted in one location will be treated on a sovereign basis with opportunities for flexible regimes (e.g. Estonia and Luxembourg and its ground breaking “Data Embassy” agreement) to prosper.
Financing data centres
As the nature of data centres evolves, so too do the financing models behind them. Traditional single-asset project finance structures are increasingly giving way to portfolio and debt-led models for larger, multi-site developments. In parallel, there has been growing interest in asset-backed securities (ABS) structures which could open up new capital avenues, but require careful navigation of legal and regulatory risks.
One of the first factors any data centre investor (on both a credit and equity basis) must assess is the certainty of the contracted capacity. Unlike retail businesses where customer bases can shift and grow organically, data centres cannot simply find new customers once capacity is built. To do this in a way that matches their credit appetite, investors must differentiate between risk profiles. A government-backed rural fibre project, for example, does not have the same risk profile as that of a hyperscaler-backed urban data centre.
This makes off-take agreements central to any deal. These contracts, now far more complex than in the past, need to clearly define the volume of capacity being purchased, the commercial terms and any built-in flexibility. Investors must understand the reliability of cash flow and how a contract can be terminated, which is sometimes challenging when dealing with extremely strong commercial counterparties. Moreover, strong anchor off-takers can impose restrictions on co-location tenants which then limit the universe of potential customers.
Another area that has grown in complexity is the timeline and deliverability frameworks. Investors today need to be much more alert to nuances. For example, a failure to meet the “ready-for-service” date might technically trigger a default, but this risk can often be mitigated or redefined through negotiation.
With large construction projects, timelines inevitably shift, making it essential to know when delays might occur and who carries the risk if they do. It is also crucial to ensure these risks are accurately reflected in all commercial contracts, including off-take agreements and energy procurement contracts, to avoid material mismatches and safeguard the financial model.
This leads to a third concern: cost overruns. These are common across the infrastructure sector, but their impact – and how they are handled – varies. European investors tend to be more conservative and laser-focused on who picks up the tab, whereas US investors may show greater tolerance if returns justify the risk. It is an issue for discussion, particularly as there is a clear difference in risk between experienced sponsors and new market entrants (and can also be linked to contracted capacity). The downside scenario for an investor is completed capacity only to find there’s limited or no demand for it and, accordingly, contracted capacity and cost overrun coverage become intrinsically linked.
A growing sector, but is there space to grow?
The data centres sector is booming and the variety of investors in this space is broadening significantly. It has moved on from founders backed by angels or project finance, to governments and sovereigns, the pension fund community, as well as private equity players.
However, although the market’s direction is clear, a few crosswinds could make the journey bumpy.
In emerging markets there is massive demand for data centres, but there remains the caveat of local currency versus US dollar performance, which could reduce returns.
In all markets consumers also remain fickle. There is a constant demand for an improved product for a lower price, at the same time as pressure on more sustainable and more resilient digital infrastructure. Plus there is now pressure to deliver projects in Europe that are truly sustainable, which can imply higher cost considerations.
Moreover, and especially with 'edge' data centre developments, physical space to expand sites in prime locations and add on sub-stations and other accretive infrastructure may be inherently limited by high land prices (and, as flagged above, limitations on power).
Despite these distractions, with the right guidance there remain clear opportunities for well-prepared investors.
