Investment Potential in Data Centers

 

The unprecedented growth in data center demand has captured the attention of investors across sectors, from growth capital and buyout firms to real estate and infrastructure investors. McKinsey's analysis (*1) projects that U.S. market demand, as measured by power consumption, will reach 35 gigawatts (GW) by 2030, doubling from 2022. The global market, in which the United States holds a substantial 40 percent share, continues to expand significantly. The latest CBRE report (*2) also sees similarly strong market growth in Europe. Especially for the FLAP cities, Frankfurt, London, Amsterdam and Paris.

 

In 2021 alone, the data center sector saw 209 deals valued at more than $48 billion, a 40 percent increase from the previous year. Private equity buyers in particular have played a dominant role, accounting for over 90 percent of deals in the first half of 2022. However, potential challenges such as rising interest rates and increased competition, particularly from cloud providers, could affect the industry's trajectory.

 

This report examines the investment potential in the evolving data center landscape, with a particular focus on the emerging trend of edge data centers. The sector continues to offer lucrative opportunities for investors willing to navigate the complexities of the market.

 

The Current Data Center Landscape

Data centers are primarily owned and operated by large corporations for internal use or by colocation companies that lease space and provide essential services. Investors are attracted to the steady cash flows and risk-adjusted returns associated with data center operations. Growing interest is evidenced by the increasing number and value of deals, with private equity buyers playing a more prominent role in recent years.

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Challenges as pressure on operating margins from large cloud providers could impact the sector's growth. While cloud giants such as Amazon Web Services and Google Cloud are important customers for colocation companies, they are also increasingly signing shorter-term contracts and demanding favorable lease terms, posing potential risks for long-term investors.

 

Exploring Investment Opportunities

Despite potential challenges in the traditional data center market, this report aims to shed light on specific areas within the data center value chain where investment opportunities are high. Key areas of focus include sustainable power, cooling and energy consumption technologies, pre-engineered and modular data centers and the emerging field of edge computing.

 

​1. Sustainable (Green) Energy 

Data centers are significant energy consumers, and the push toward sustainability has created opportunities for investors. Hyperscalers, in particular, are committed to using carbon-free energy, opening up opportunities for investment in renewable energy facilities, power purchase agreements (PPAs) and storage solutions. 

 

2. Cooling and Power Technologies

The rise in computing power and innovative chip designs has increased the demand for efficient cooling systems. Investors can explore opportunities in the development and deployment of technologies such as immersion cooling, artificial intelligence and machine learning and waste heat applications. 

 

3. Prefabricated and Modular Data Centers

The demand for new data centers has led to potential investment opportunities in the prefabricated and modular (PFM) space. The report examines the different types of PFM solutions and the potential benefits they offer in terms of cost reduction, construction time and sustainability.

  

4. Edge Computing

As enterprises move to the public cloud, the growing demand for real-time insights and privacy regulations have fueled the growth of edge computing. The report discusses the real estate and technology investment opportunities within the edge computing ecosystem. 

  

Conclusion 

In conclusion, while traditional data center investments remain viable, the evolving landscape opens up a myriad of opportunities for investors across the data center value chain. By strategically addressing challenges and focusing on emerging trends such as sustainable energy, cooling technologies, modular solutions and edge computing, investors can position themselves to capitalize on the dynamic growth of the data center industry.

As data centers play a central role in the global economy, considering the entire value chain is critical to maximizing returns and staying ahead of the curve in this dynamic market.

 

 

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Chapter 1. Sustainable (Green) Energy

 

In the quest for sustainability, the data center industry is undergoing a significant shift toward green energy solutions. Because data centers are notorious energy consumers, the imperative to transition to renewable energy sources has never been stronger. This chapter explores the investment potential of sustainable energy initiatives for data centers, highlighting opportunities and challenges in this burgeoning field.

 

Data centers, especially those operated by hyperscalers, consume massive amounts of energy, often compared to the power consumption of small cities. As environmental concerns grow and regulations tighten, the pressure to reduce carbon footprints becomes paramount. Hyperscalers such as Apple, Google and Meta have made ambitious commitments to achieve carbon neutrality through the use of renewable energy sources.

 

One way for data center owners to transition to green energy is through Power Purchase Agreements (PPAs). These agreements are long-term contracts between data center operators and renewable energy providers that guarantee a stable and often cheaper source of electricity. By investing in renewable energy facilities and signing PPAs, data center owners can align with sustainability goals while ensuring a reliable power supply for their operations.

 

While the transition to renewable energy is promising, challenges remain. The intermittent nature of renewables such as solar and wind requires innovative solutions to ensure a continuous supply of energy. "24/7" PPAs that combine renewable sources with stored energy are a viable option, but come at a higher cost due to current limitations in storage technologies. In addition, backup power during outages remains a concern, with lithium-ion batteries emerging as a promising solution despite cost considerations.

 

Continued investment in R&D is critical to overcoming technology barriers and advancing sustainable energy solutions for data centers. Research into stable renewable energy technologies, such as geothermal and wave energy, holds great promise for achieving carbon-free backup power and storage. Investors can play a key role in funding and piloting innovative solutions that meet the evolving needs of the data center industry.

 

Conclusion

In summary, sustainable energy initiatives represent a compelling investment frontier within the data center industry. With increasing pressure to reduce environmental impact, data center operators are embracing renewable energy solutions to drive both profitability and sustainability. By strategically investing in power purchase agreements, renewable energy facilities, and R&D efforts, investors can capitalize on the growing demand for green energy while fostering a more sustainable future for data center operations.

 

 

 

Chapter 2. Cooling and Power Technologies

 

Efficient cooling and power management are critical aspects of data center operations, given the significant energy consumption and heat generation associated with server infrastructure. This chapter examines the investment opportunities and technological advances in cooling systems and energy efficiency technologies within the data center industry.

 

Cooling systems play a critical role in maintaining optimal operating conditions in data centers. As server density and computing power increase, the need for efficient cooling solutions becomes paramount. Traditional air conditioning-like systems are being replaced by innovative cooling designs to meet the challenges of increasing power densities and environmental factors.

 

Cooling accounts for a significant portion of a data center's total energy consumption, often as much as 40 percent. The increasing power densities of today's servers exacerbate this challenge, requiring more efficient cooling solutions to reduce energy waste and lower operating costs. In addition, the potential financial losses associated with downtime due to overheating underscore the need for reliable cooling systems.

 

In recent years, cooling technologies have advanced rapidly to improve energy efficiency and thermal management in data centers. Immersion cooling, in which servers are submerged in a coolant, and direct-to-chip/cold-plate cooling are emerging as promising solutions to the heat dissipation challenges associated with high-density environments.

 

The integration of artificial intelligence (AI) and machine learning (ML) algorithms has revolutionized data center cooling management. Hyperscalers are using AI/ML to dynamically allocate cooling resources based on workload intensity and power loads across server racks, resulting in significant reductions in power consumption and improved efficiency.

 

To minimize environmental impact and maximize resource utilization, waste heat applications are gaining traction in the data center industry. By reusing excess heat generated by data center operations for district heating or other purposes, companies can improve sustainability while reducing operating costs.

 

Addressing the complex challenges associated with data center cooling and energy consumption will require a collaborative effort across the industry. Investors can play a critical role in fostering collaboration between data center operators, technology providers, and research institutions to drive innovation and accelerate the adoption of sustainable cooling solutions.

 

Conclusion

In summary, cooling and energy consumption technologies represent an area ripe for investment in the data center industry. As data center operators strive to optimize energy efficiency and reduce environmental impact, there is a growing demand for innovative cooling solutions that can meet the evolving needs of modern data centers. By investing in cutting-edge technologies and fostering collaboration, investors can position themselves to capitalize on the lucrative opportunities presented by the changing landscape of data center operations.

 

 

 

Chapter 3. Prefabricated and Modular Data Centers

 

The escalating demand for data center infrastructure, coupled with the challenges of traditional construction methods, has led to a surge in interest in prefabricated and modular (PFM) data center solutions. This chapter examines the investment opportunities and technological advancements that are driving the adoption of PFM data centers in the rapidly evolving data center construction landscape.

 

Prefabricated and modular data centers offer a disruptive alternative to traditional brick-and-mortar construction methods. These solutions involve assembling pre-engineered components off-site and transporting them to the final location for rapid deployment. By streamlining the construction process and minimizing on-site labor, PFM data centers offer significant cost savings, improved scalability, and faster time to market.

 

Increasing demand for data center capacity, particularly from hyperscale cloud providers, has fueled the growth of the PFM data center market. According to industry reports, hyperscalers alone have allocated billions of dollars to expand capacity, a significant portion of which has been spent on PFM solutions. As data center operators look to deploy infrastructure quickly and efficiently, the demand for pre-engineered and modular solutions continues to grow.

 

PFM data centers include a variety of prefabricated and modularized components that address different aspects of data center construction. These include:

- Prefabricated structural and architectural components, such as concrete beams, walls, and slabs, that are manufactured off-site and assembled on-site to expedite construction.

- Skid-mounted MEP (mechanical, electrical and plumbing) equipment, which includes metal racks for mounting and connecting critical infrastructure components such as power and cooling systems.

- Enclosed MEP modules, which integrate MEP equipment into self-contained cabinets for easy installation and maintenance.

- All-in-one data centers, which provide turnkey solutions for smaller facilities with lower power requirements.

 

PFM data centers offer several advantages over traditional construction methods, including

- Reduced construction time: Prefabricated components can be manufactured concurrently with site preparation, resulting in shorter project timelines.

- Cost savings: By standardizing components and minimizing on-site labor, PFM data centers offer significant cost savings over conventional construction.

- Scalability and flexibility: Modular designs allow for easy expansion and customization, enabling data center operators to adapt to changing needs and scale their infrastructure as needed.

 

As the data center industry continues to evolve, pre-engineered and modular solutions will play an increasingly important role in meeting growing infrastructure demands. By leveraging innovative construction techniques and embracing modular designs, data center operators can achieve greater efficiency, scalability and sustainability in their infrastructure deployments.

  

Conclusion

In summary, prefabricated and modular data centers represent a disruptive force in data center infrastructure construction, offering significant cost, speed and flexibility advantages. As the demand for data center capacity continues to grow, investors have a unique opportunity to capitalize on the growth of the PFM data center market by strategically investing in innovative prefabricated and modular solutions that drive efficiency and agility in data center construction.

 

 

 

Chapter 4. Edge Computing

 

Edge computing has emerged as a transformative paradigm in data processing and analytics, enabling real-time insights and low-latency applications closer to the data source. This chapter explores the investment potential and technological advancements that are driving the adoption of edge computing solutions in the evolving landscape of data-driven applications and services. Traditional cloud computing architectures centralize data processing and storage in large data centers located in remote regions. However, the proliferation of IoT devices, autonomous systems, and latency-sensitive applications has highlighted the limitations of centralized cloud computing in meeting the demands of modern digital ecosystems. Edge computing addresses this challenge by decentralizing computing and moving compute closer to the data source, reducing latency and improving performance for critical applications.

 

The market for edge computing solutions is experiencing rapid growth, driven by the increasing adoption of IoT devices, the emergence of 5G networks, and the demand for real-time data analytics. According to IDC (*3) , global spending on edge solutions is expected to reach $232 Billion in 2024, reflecting a significant increase in investment across multiple industries. Demand for edge infrastructure continues to grow as organizations look to leverage edge computing for applications such as autonomous vehicles, smart cities, and industrial automation.

 

Edge computing infrastructure often consists of smaller, distributed data centers located closer to end users or IoT devices, requiring strategic real estate investments. Unlike traditional data centers, which are typically located in remote regions with abundant land and cheap power, edge data centers are located in urban areas or at the edge of the network to minimize latency and optimize performance. Investors can capitalize on the growing demand for edge data center facilities by acquiring or developing real estate in strategic locations and leasing space to edge computing providers.

 

In addition to real estate, investors can explore opportunities in edge computing technology, including hardware, connectivity, platforms and software. The components of the edge computing tech stack are not entirely new, but the challenge is to effectively deploy and architect these technologies at the edge. Hyperscalers, telcos, and large systems integrators are actively investing in edge technology startups to strengthen their capabilities in areas such as edge orchestration, security, and data management. Private investors interested in data center infrastructure may also consider investing in edge technology startups to capitalize on the emerging market.

 

To gain a competitive edge in the rapidly evolving edge computing market, companies are forging strategic partnerships and acquisitions to enhance their capabilities and expand their footprint. For example, telecom providers are partnering with cloud providers and edge startups to deliver edge computing services over 5G networks. Similarly, cloud providers are acquiring edge computing specialists to strengthen their edge offerings and address the unique requirements of latency-sensitive applications.

  

Conclusion

In summary, edge computing represents a significant opportunity for investors looking to capitalize on the growing demand for real-time data processing and low-latency applications. As companies embrace edge computing to power the next generation of digital services, strategic investments in edge infrastructure, technology, and partnerships can yield significant returns. By aligning with the evolving needs of the digital economy and leveraging innovative edge solutions, investors can position themselves at the forefront of the edge computing evolution.

 

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Sources

• Own research

• *1: McKinsey & Company report 1/23, “Investing in the rising data center economy”

• *2: CBRE report 7/23, "Global Data Center Trends 2023"

• *3: IDC Spending Guides report 3/24, “New IDC Spending Guide Forecasts Edge Computing Investments

            Will Reach $232 Billion in 2024”

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