By Tanuja Adiani, Managing Director, U.S. Fund Administration
Data centers have emerged as an increasingly sought-after asset class. While not a new concept, they have evolved significantly in recent decades. In the 1950s and 60s, “data centers” were simply mainframes – islands of computing power with no network connectivity. Today, they’re advanced, interconnected hubs, designed for low latency to support a range of applications.
While the computational power of a 1960s mainframe now fits in the palm of our hands, advances in artificial intelligence continue to drive demand for large-scale data centers, far outpacing supply. As an example, Amazon has announced it will be committed to investing over $100 billion in AI-focused data centres by 2035.
Key considerations for data centers
As the market tightens, Goldman Sachs predicts data center occupancy will rise from 85% in 2023 to over 95% by 2026, indicating a continued surge in demand. This growth is prompting more investors to turn to data centers, viewing them as a stable, long-term asset class.
For those considering data centers as an asset class, key considerations include:
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Power
A small data center typically consumes between one to five megawatts (MW) of power, while larger facilities can consume anywhere from 20 to over 100MW. Demand for data centers has led to the creation of massive data center campuses capable of generating over a gigawatt (1,000 MW) of power. Factors affecting power usage include the number of servers and the type of cooling systems used.
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Space
The average data center spans approximately 100,000 square feet, though larger data centers can require millions of square feet. As the demand for cloud computing and data storage continues to rise, the need for expansive data centers, or “mega complexes”, is growing. In addition, the rise of AI and innovations in AI model training are spurring the development of smaller data centers ranging from 5,000 to 20,000 square feet.
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Connectivity
After space and power, connectivity is another critical factor for data center developers. Both geographic location and data transmission mediums are essential to ensuring data is transmitted with minimal latency. Locations with high internet exchange points (IXPs) and dense populations are particularly favorable. Data Center Interconnect (DCI) technology connects two or more data centers together over short, medium or long distances using high-speed packet-optical connectivity. However, increasing the capacity and reach of DCI networks remains a key challenge.
Investment opportunities in data centers
Today, depending on a business’s needs, the type and volume of data that needs to be handled, the applications being used, regulatory requirements, and buying power, there are many types of data centers to choose from, including enterprise, hyperscale, edge, and colocation.
Historically, investing in data centers required large capital investments to cover due diligence and power delivery processes. Initial data center developments were government and/or military funded with technology entrenched companies like IBM, Burroughs, Datamatic, GE, RCA and Philco closely following in the 1950s and ‘60s. Private equity firms with expertise in infrastructure and real estate and with access to large amounts of capital began investing in data centers as early as 2001.
The continued growth in demand for colocation spaces has led to a significant decrease in vacancy. JLL research indicates that colocation data center vacancy rates hit a low of 3% in mid-2024. The construction of AI infrastructure has attracted significant investment, with government and technology companies collaborating to unlock up to $500 billion in private funding.
Against a backdrop of socio-political shifts, evolving regulations and continuous technology developments, the opportunities for private equity, private credit and private wealth managers in the data center capital stack can be lucrative, long-term and multi-layered.
Back- and middle-office support for data center investments
As the layers and complexity of the asset and capital structure increase, so too do investors’ needs for accessible data and streamlined processes. As more asset managers enter the data center space and existing managers seek to offload administrative burden to the fund entities (instead of bearing it at management company level), service providers like IQ-EQ play an important role.
Service providers who understand the nuances and challenges associated with a complex asset class like data centers bring invaluable experience and are able to actively implement solutions to the reporting burdens faced by sponsors and portfolio companies.
Speak to IQ-EQ
At IQ-EQ, we offer multi-asset expertise, global coverage and a range of services such as regulatory compliance, AML/KYC solutions, fund accounting, portfolio reporting, tax managed services and a leading-edge data platform. By outsourcing these functions, fund and asset managers investing in data centers can focus on core operational concerns such as power distribution, DCI networks, cooling systems and colocation tenants.
We understand that data is key to driving strategy and growth. Our technology offering, developed with input from our client-facing teams, serves as a single source of truth for our clients’ reporting needs. We help our clients streamline operations, reduce overheads and focus on their data center investment strategies.
Get in touch with our experts to learn more.
About the author
Tanuja is a Managing Director at IQ-EQ with over 20 years of progressive accomplishments in financial reporting and operations. As a part of IQ-EQ’s U.S. fund administration team, she leads new business initiatives including launching a new product line, deploying robotics and pursuing new engagements related to portfolio management, alternate investment funds, complex consolidations, GP operations and investment reporting.
