Whenever one of the savviest private equity players on the planet moves into a new asset class it is worth paying attention. So, the news that the mighty Blackstone Group has announced a $7 billion joint-venture with Digital Realty to build four hyperscale data centre campuses in Frankfurt, Paris and North Virginia should focus minds. In fact, Blackstone COO and President, Jon Gray, makes it very clear what is driving their focus – “Data centres are experiencing once-in-a-generation demand growth driven by cloud adoption and the AI revolution. Digital infrastructure is one of our highest conviction investment themes as a firm, and this transaction with trusted data centre operator in Digital Realty is another example of how we are investing in this trend”. Regular readers of our analyses will not be surprised with the AI thematic linkage but the scale of some businesses servicing or operating in the data centre sector might wobble a few heads. Try Digital Realty for starters.
Founded in 2004 in Austin, Texas, Digital Realty is an investment vehicle (real estate investment trust) which owns, operates and invests in data centres around the world. In less than 20 years, it has built a portfolio of 300 data centres across 50+ metro areas in 25 countries on 6 continents with 3,500 employees and a combined asset value of more than $150 billion. Profits for the group last year were just shy of $2.5 billion. Nice business, if you can get it. However, if you were looking for the company which is doing the nicest business of all in the AI-powered data centre revolution then it has to be that other company nobody had ever heard of before 2023 and the arrival of ChatGPT…..Nvidia.
We wrote recently about how cloud adoption revenues were able to move valuations of tech giants, Google and Microsoft, by more than $200 billion in a single night (November 17th) of Wall Street trading but arguably Nvidia is the only trillion dollar mover at the moment. Its market value is now over $1 trillion thanks to a share price which has rocketed 240% in 2023 alone. And, if that feels a bit giddy, then check out Nvidia’s latest Wall Street quarterly update published on November 21st. For the second consecutive quarter the world’s best financial analysts were wrong. The company’s $18 billion of revenues were, again, $2 billion more than what the average analyst had plugged into his/her modelled projections. So, if you were wondering whether a share price moving by more than 200% in less than a year sounds like irrational exuberance you’d be wrong too. Nividia’s revenues generated by its best-in class chips (used in data centres) totalled $14.5 billion and was 279% higher than the same period a year ago. You can begin to see why Blackstone is joining the dots; digital infrastructure…AI chips…cloud computing…..explosive demand for data centres…..and their construction.
At SilverBack, we too are joining the construction dots. Hence, we were delighted to attend and present at the recent Ireland-Poland Data Centre Forum in Warsaw. Presentations highlighted the two decade experience of Irish firms building hyperscale data centres for global technology firms like Amazon, Microsoft and Facebook/Meta. More importantly, this project experience has created a cluster of 60 Irish companies bringing their expertise and services to high-tech construction projects all over the world. Businesses range from general contractors to engineering specialists to energy/grid connectivity to fit-out systems suppliers to recruitment services. Clearly, with the ramp up of data centre construction the services of these firms are in demand. Indeed, the rapid expansion of the Polish data centre sector and the early involvement of Irish firms in these projects makes these networking and introductory events very timely. It is also apparent that data centre construction is evolving too.
In the past, only large enterprises could afford the space, resources, and IT teams required by the data centres. Due to the development of AI, machine learning, IoT, blockchain and cloud computing services the big tech corporations like Google, Amazon and Microsoft need to operate modular ‘hyperscale’ data centres. These facilities don’t serve one enterprise but multiple companies dependent on mission-critical digital applications. In order to deliver those services, more than 5,000 servers are required to be housed, powered, cooled and secured.
Data centres must also cope with big swings in demand and workloads while also capable of adding more computing power and hardware. Hence, the modular approach now required in their construction which will typically occupy a minimum of 10,000 square feet and provide at least 40 megawatts (MW) of capacity. However, this increasingly looks like a historical minimum as ‘scale’ moves into true hyper territory; see Apple’s Mesa data centre in Arizona which spans 1.3 million square feet. But… a shift in scale is not the only indication of growth.
According to Precedence Research, the global market size for hyperscale data centres was estimated at $62 billion in 2021. This market size is expected to reach $593 billion by 2030, representing a 28.42% compound annual growth rate (CAGR). There are even more bullish projections out there – Dell’Oro research forecasts capital expenditure in 2023 alone to reach $266 billion and on a trajectory to hit the half a trillion dollar mark in the next three years. For 2024, the explosion in AI demand will quite likely drive data centre project spend over $300 billion, provided Nvidia can deliver those chips.
Returning to Poland, the country has become the 15th largest Data Centre market in the world(Source: Data Centre Magazine). For those readers who saw our recent article on data centres becoming a growth proxy for Artificial Intelligence (AI) it is interesting to see PMR analysis forecasting a doubling in power capacity from 107 MW in 2021 to 215 MW by 2027. Warsaw is the dominant market offering 61% of capacity led by Data4, Microsoft and Atman. Oh, and Atman has an interesting partner too.
Atman has been a local leader in the Polish data centre market since 2011. Then, in December 2020 they were acquired by Global Compute Infrastructure for an undisclosed amount. However, the backers of Global Compute are actually Goldman Sachs’ merchant banking division who have funded the vehicle with $1.5 billion to buy digital infrastructure around the world. And, the management team installed by Goldman Sachs in Global Compute happen to be the former co-founders of Blackstone’s new partners, Digital Realty. Small world you might say, but clearly the money people at Blackstone and Goldman Sachs see big things ahead for data centres.