Private equity piles into data centers

Private equity keeps buying up data centers, despite the warnings of a veteran short-seller.

Driving the news: An investor group yesterday agreed to pay $1.5 billion for a 35% stake in Dallas-based DataBank, while Malaysian telco Time Dotcom reportedly short-listed final bidders for a data center unit that could be valued at around $600 million.

• There's also the ongoing auction process for London-based data center operator Global Switch, which is expected to fetch more than $10 billion.

By the numbers: 2022 already is a record year for PE investment in data centers, per PitchBook.

• The research group reports $41.5 billion of deal value as of Aug. 25, which doesn't include DataBank, topping the $36.8 billion from 2013 and last year's $27.7 billion tally.
• The year's largest data center buyout was CyrusOne, which KKR and Global Infrastructure Partners took private for around $15 billion.

The big picture: Private equity's interest in data centers is largely about predictable cash flows. Plus, there's dry powder pressure tied to the infrastructure fundraising boom, and a PE belief that legacy location is a key differentiator.

There's at least one notable naysayer: Jim Chanos, who's raising several hundred million dollars for a fund that will short U.S. data center groups.

• Yes, Chanos invests in public equities instead of in private equities. But his thesis would hold for both.

• He basically believes that cloud giants like Amazon, Google and Microsoft will come to dominate the data center market. Not just by building massive facilities for their own services, but by cheaply leasing out space in those data centers to others that currently contract with traditional players.
• For context, Chanos has made some very good short bets (e.g., Enron) and some very bad ones (e.g., Tesla).

The bottom line: This could become private equity vs. Big Tech. Or maybe the other way around.