Why data center compliance is a growing priority for fund managers

By Sean Wilke, Head of Growth Strategy, Compliance, Americas

Key takeaways:

1. Data center investments trigger compliance across five regimes – valuation, foreign investment, data privacy, environmental, and conflicts – many outside standard private fund frameworks
2. CFIUS enforcement is surging: 2023–24 penalties were 3x higher than the prior 50 years combined, with fines up to $60M
3. Treating data center compliance as anything less than a governance priority creates significant risk exposure

Private equity investment in U.S. data centers reached $45.7 billion in 2025, accounting for nearly 72% of all capital deployed into the sector. The demand drivers are well-understood: AI workloads, hyperscaler expansion, and cloud infrastructure build-out are creating a multi-decade tailwind that institutional investors want exposure to.

But for most fund managers, the compliance implications of data center investments remain murky. Unlike traditional real estate or pure infrastructure, data centers sit at the intersection of several regulatory regimes, and the existing compliance frameworks most private fund advisers have in place simply weren’t built to accommodate them.

In this article, we identify the five primary compliance obligations fund managers should know about and outline what a well-considered compliance response looks like.

#1: Valuation and fair value complexity under ASC 820

Many data center compliance problems begin at valuation, because data centers don’t fit neatly into any single valuation framework. Depending on the asset’s characteristics, advisers may apply real estate comparables, infrastructure discounted cash flow (DCF) models, or enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiples. That choice has material implications for net asset value (NAV) calculations, performance reporting, and fair value disclosures required under the Investment Advisers Act.

The Securities and Exchange Commission’s (SEC) Division of Examinations has consistently identified fair valuation as a top deficiency area for private fund advisers, especially when:

• Methodologies are inconsistent between periods
• Level 3 inputs are inadequately documented
• Conflicts exist between adviser fees and fair value determination

For data centers, Level 3 inputs are especially complex:

• Power contracts: Pricing, remaining term, and renewal probability all materially affect value
• Tenant structure: Hyperscaler lease terms and renewal likelihoods aren’t comparable to traditional commercial real estate
• Infrastructure obsolescence: Rack density evolution moves quickly and can significantly alter residual value assumptions
• Discount rates: Advisers often find themselves drawing on infrastructure, real estate, and technology comparables simultaneously, which demands explicit policy guidance

What this means for your compliance program:

Your Valuation Policy should explicitly address how data center assets are classified, which inputs govern at each stage of the asset lifecycle (development, lease-up, stabilized), and how valuation-related conflicts of interest are identified and managed.

#2: CFIUS and National Security Review

In 2023 and 2024 combined, the Committee on Foreign Investment in the United States (CFIUS) issued three times more penalties than it did in the 50 years prior, with the largest single fine totaling $60 million. The underlying message is clear: CFIUS means business.

Data centers sit near the top of the Committee’s scrutiny list, particularly where:

• The facility handles sensitive personal data, government agency workloads, or critical infrastructure traffic
• The physical location is close to military installations or federal facilities
• Non-U.S. nationals hold 10% or more of a fund or special purpose vehicle’s (SPV) interests

What this means for your compliance program:

The compliance obligation for fund managers extends beyond deal-level structuring. Foreign Investment Risk Review Modernization Act (FIRRMA) regulations require advisers to think about CFIUS at the limited partner (LP) level, too. Penalties for inadequate due diligence can include mandatory divestiture, civil monetary penalties, and even criminal referral.

Managers should:

• Screen LPs for CFIUS exposure before capital calls on data center acquisitions rather than just at onboarding
• Include CFIUS representations and covenants in LPAs and side letters
• Establish ongoing LP monitoring protocols, as post-closing interest transfers can independently trigger review obligations
• Coordinate early with outside counsel on mandatory vs. voluntary declaration decisions

#3: Data privacy and downstream liability through tenant exposure

One of the most underappreciated risk vectors in data center investing is downstream data privacy. A private fund that owns a data center facility doesn’t process personal data in the traditional sense. But where the fund has an active operational role, as in value-add data center strategies, compliance exposure can become direct.

What this means for your compliance program:

State-level exposure:

• The California Consumer Privacy Act (CCPA) applies broadly to businesses handling personal information of California residents. Where a fund’s management company or operating affiliate has meaningful operational involvement in a facility serving California residents, CCPA obligations can attach
• Colorado, Virginia, Connecticut, Texas, and a growing number of other states have implemented parallel frameworks, each with its own thresholds and enforcement regimes

Sector-specific exposure:

• HIPAA/HITECH: Facilities housing healthcare data processors may trigger Business Associate Agreement requirements if the fund’s operating entity handles protected health information
• FedRAMP/FISMA: Data centers with government cloud tenants must comply with federal security standards. Non-compliance can result in loss of government contracts at the asset level, with direct downstream value implications

LP-facing pressure:

Institutional LPs are increasingly requesting data privacy representations in side letters and due diligence questionnaires (DDQs). Advisers should expect questions around:

• Tenant screening standards
• Incident response protocols
• Whether the fund’s Written Supervisory Procedures address privacy exposure at the portfolio company level

#4: Environmental and permitting compliance

Data centers are among the most energy-intensive commercial assets in the U.S. economy. According to Gartner, global data center electricity consumption is expected to reach 565 TWh in 2026, up 26% from 447 TWh in 2025. The International Energy Agency projects that consumption could double by 2030, and regulatory scrutiny is rising accordingly.

What this means for your compliance program:

For private fund managers, environmental compliance spans several overlapping frameworks:

• Environmental Protection Agency (EPA) Clean Air Act: Large on-site generators (used as backup power in data center facilities) are subject to emissions permitting and testing requirements under the National Emission Standards for Hazardous Air Pollutants (NESHAP). The EPA recently launched a dedicated Clean Air Act resource hub for data centers, consolidating existing guidance on permitting thresholds and how to avoid triggering costly “major source” requirements
• Water consumption: Evaporative cooling systems implicate state water rights and permitting frameworks, particularly in water-constrained western states where scarcity is a material operational risk
• State and local permitting: Construction, expansion, and generator installations typically require permits with lead times that are frequently underweighted in acquisition underwriting
• ESG reporting: Institutional LPs are increasingly requiring PUE (Power Usage Effectiveness) metrics, renewable energy sourcing data, and water consumption disclosures as part of standard reporting. Advisers who aren’t capturing this data won’t be able to satisfy LP reporting expectations as these allocations scale

#5: Conflicts of interest and Form ADV disclosure

Data center investment strategies frequently involve multiple vehicles pursuing overlapping opportunities; flagship funds, co-investment SPVs, and separately managed accounts (SMAs) may all participate in the same acquisition. This creates allocation conflicts that require written policies and procedures, plus disclosure in Form ADV Part 2A.

Specific scenarios requiring proactive governance include:

• Preferred co-investment economics relative to fund-level investors
• Adviser or affiliate relationships with data center operators, construction contractors, or power vendors engaged by the fund
• Use of fund capital to support assets where principals hold personal positions

What this means for your compliance program:

Outdated or incomplete Form ADV disclosures, particularly in Item 4 (Other Business Activities) and Item 10 (Other Financial Industry Activities and Affiliations), remain one of the most common deficiencies flagged in SEC examinations of private fund advisers.

Data center-specific relationships with operators, hyperscaler counterparties, and infrastructure firms should be explicitly reviewed as part of every annual ADV update.

Suggested governance framework for data center compliance

How IQ-EQ can help

IQ-EQ combines deep expertise in real assets – including real estate and digital infrastructure – with an integrated operating model spanning fund administration, alternative investment fund management (AIFM) services, compliance, ESG reporting, and investor relations.

We support both limited partners (LPs) allocating to data center strategies and general partners (GPs) raising and scaling them across complex, multi-jurisdictional structures.

On the operational side, we use technology including Yardi and proprietary data solutions to give clients a single, coherent view across their fund structures. That level of integration matters in data center investing, where compliance obligations cut across valuation, regulatory review, environmental reporting, and LP disclosure simultaneously.

Building or scaling a data center fund strategy and looking for a partner who understands both the compliance landscape and the asset class? Contact our team today.

To explore how leading managers are addressing these challenges and for practical guidance on energy strategies, ESG reporting, operational oversight and infrastructure design, read our latest whitepaper: Driving data centres from environmental liability to sustainable powerhouse.

About the author

Sean Wilke is IQ-EQ’s Head of Growth Strategy, Compliance, Americas and has extensive experience supporting various types of buy-side investment managers (including hedge funds, venture capital funds, private equity/credit funds, wealth managers, registered investment companies, institutional allocators, and family offices) on regulatory, compliance, operational and management matters. He was also heavily involved in developing our proprietary gVUE regtech platform. Before joining IQ-EQ in 2018, Sean was a managing director within the Governance, Risk, Investigations and Disputes group at Duff & Phelps (now Kroll), where he focused on compliance and regulatory consulting for the alternative investment space.

Frequently asked questions

Does CFIUS review apply to a data center fund with no foreign investors?

Not necessarily, but the analysis is more nuanced than an LP nationality check. CFIUS jurisdiction under FIRRMA can be triggered by indirect foreign ownership structures, foreign LPs in upstream feeder vehicles, or co-investment arrangements involving non-U.S. persons. The screening obligation runs to the LP level, not just the asset level, and applies at onboarding and before capital calls.

What triggers data privacy compliance obligations for a data center owner?

The primary trigger is operational involvement. A passive ownership structure carries minimal direct exposure, but a value-add strategy—where the fund’s operating entities are actively managing the facility, engaging with tenants, or overseeing data handling practices—is likely subject to data privacy obligations. Tenant mix also impacts the exposure profile.

How do hyperscaler lease structures affect data center valuation under ASC 820?

Hyperscaler tenants typically sign long-term leases (10–20 years) with renewal options tied to infrastructure specifications rather than market rent. Valuation models that treat these like standard commercial real estate tenancy misrepresent the risk profile. Renewal probability assumptions, contractual power commitments, and the obsolescence trajectory of the facility’s technical specifications are all Level 3 inputs requiring explicit policy treatment.

What should fund managers disclose on Form ADV about data center investments?

At minimum, Form ADV Part 2A should address any adviser or affiliate relationships with data center operators, hyperscaler counterparties, construction firms, or power vendors engaged by portfolio companies. Co-investment structures, preferred arrangements, and key person investments in data center assets should be reviewed annually.