Private Equity Firms Are Taking Over The Data Center Market

Private equity accounted for a massive 80 percent of all data center acquisitions that closed in 2019, driving data center M&A to new heights.

Private equity firms are taking over the data center market, accounting for approximately 80 percent of all data center acquisitions in 2019. This massive injection of private equity funding led data center M&A to reach a record high of approximately 105 deals in 2019, up 6 percent compared to 2018, according to new data by market research firm Synergy Research Group.

John Dinsdale, a chief analyst at Synergy Research Group, told CRN that private equity interest in the data center industry has never been this high.

“The number of private equity deals that closed in 2019 were more than double the number that closed in 2017 and more than four times the number in 2016. I can also tell you that the total value of private equity deals in 2019 was at an all-time high, by a wide margin,” said Dinsdale in an interview with CRN.

The amount of private equity data center acquisitions jumped 50 percent in 2019 compared to 2018, which offset a sharp 45 percent drop in M&A deals closed by public companies.

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The data center market is being bought up by private equity firms as they form joint ventures with some of the biggest publicly traded data center operators in the world. Data centers are important assets that enable significant growth in cloud services and for hyperscale operators such as Amazon, Google and Microsoft.

“There are some industry-wide mega trends that are helping to drive up financial interest in data centers – the growth of cloud computing, the growth of hyperscale operators, continued aggressive investment in data center expansion by hyperscale operators, data center divestments by enterprises, data center operators’ increased need for scale and geographic breadth,” said Dinsdale. “So there is a big opportunity in data centers and the leading public companies can’t invest enough without stressing their financials.”

Although the number of data center M&A deals increased in 2019, the aggregate value of those deals declined due to a 24 percent reduction in average deal value, according to Synergy Research Group. The decline in average data center deal value has steady declined since 2018, according to Dinsdale, with 2017 marking the peak in average deals due to several large multi-billion dollar deals. The number of billion-dollar data center deals declined in both 2018 and 2019.

“The aggressive growth of cloud services and outsourcing trends more generally are fueling a drive for scale and geographic reach among data center operators, which in turn is stimulating data center M&A activities,” said Dinsdale. “This has been attracting an ever-increasing level of private equity activity as investors seek to benefit from high-value and strategically important data center assets.”

Dinsdale said it is also key to note that the biggest publicly traded data center operators are turning toward joint ventures with external investors to help fund growth and protect balance sheets.

Looking at 2020, Dinsdale said six deals have closed in the first half of January thus far, three of which were private equity. There is also 15 more deals in the pipeline, with no slowdown in sight.

“I am pretty confident that 2020 deal value will be higher than 2019,” Dinsdale said. “In terms of deal volume, that is tougher to call but the signs are there that this will be another robust year for private equity investments.”

Since 2015, approximately 350 data center deals have closed with aggregated value of $75 billion. Over the five-year period the aggregated deal value has been split roughly equally between public companies and private equity buyers, while private equity buyers have accounted for 57 percent of the deal volume, according to Synergy Research Group.

Over the past five years, the largest deals to be closed were Digital Realty’s acquisition of DuPont Fabros, followed by Equinix’s acquisition of Verizon’s data centers and then Equinix’s acquisition of Telecity.

From 2015 to 2019, the two largest investors that standout from the pack are Digital Realty and Equinix, the world’s two leading colocation providers. In aggregate, they account for 31 percent of total deal value over the period.

Additionally, Digital Realty is set to acquire European data center giant Interxion for $8.4 billion this year in what would be the largest data center transaction ever. Other notable data center operators who have been serial acquirers include CyrusOne, Iron Mountain, Digital Bridge/DataBank, NTT, GI Partners, Carter Validus, GDS, QTS and Keppel.