There’s a very interesting study out from the top global law firm Norton Rose Fulbright analyzing the key trends and drivers of the data center market and how they will play out in M&A activity throughout this year and beyond.
It’s clear from the report that while the robust growth of the data center sector, driven by the expanding digital economy and increasing demand from sectors like AI, life sciences, and high-performance computing, is creating serious power constraint challenges, the new investment opportunities – primarily increased M&A activity, the emergence of yieldcos and the evolution of financing strategies – more than outweigh the concerns.
Here are the 7 Key Themes the report outlines:
1. Continued Growth and Critical Infrastructure Status
- Main Idea: Data centers are now considered critical infrastructure, on par with roads and airports, and are experiencing significant growth driven by digital expansion.
- Implication: This underscores the long-term importance and stability of the data center market.
- Driving Factors: Growth is fueled by general digitization and advancements in AI, life sciences, and high-performance computing, further pushing demand.
2. Power Supply as a Major Constraint
- Main Idea: Power supply is the primary obstacle to data center growth, with hyperscale and colocation facilities competing for energy near populated areas.
- Challenges: Grid connection moratoriums, grid capacity shortages, component shortages for grid connections, and sustainability concerns are all contributing to the power supply problem.
- Response: Developers are exploring alternatives like on-site power generation, gas networks and small modular nuclear reactors (SMRs). Though it should be noted that SMRs are a long-term, expensive solution still in the early stages that faces meaningful regulatory and logistical hurdles.
3. Shift Towards Sustainability and ESG
- Main Idea: Increasing investor and customer pressure for improved ESG (Environmental, Social, and Governance) credentials is influencing the sector.
- Implication: The study’s authors expect to see a greater focus on renewable power sources, energy-efficient technologies, and intelligent operations software in new data center construction and operation.
- Regulation: The EU is implementing reporting schemes to rate sustainability for large data centers, with eventual mandatory sustainability targets expected. Some EU countries already have binding renewable energy targets.
4. Robust M&A Activity and Private Equity Involvement
- Main Idea: The data center sector remains attractive to investors, leading to significant M&A activity.
- Stats: Deal values were already high in 2024, reaching $36.7 billion by mid-year with substantial future deals in the pipeline (more than $20B).
- Private Equity: Private equity involvement has dramatically increased, accounting for 85-90% of deal value in 2024, up from 54% in 2020.
- Implication: Increased competition for investment opportunities.
- Expansion: Expect increased M&A activity in related areas, such as dark fibre networks and network virtualization, as data centers focus on AI capabilities.
5. Emergence of Yieldcos
- Main Idea: Data center “yieldcos” are a new financing avenue expected to gain traction in 2025.
- Mechanism: Stable, long-term revenue-generating assets are spun off into a special purpose vehicle (SPV). This allows new types of investors to enter the market looking for stable, low-risk returns.
- Benefit: Releases capital for original operators, while attracting investors interested in a secure return on investment.
6. Evolving M&A Financing
- Main Idea: The debt market is primarily focused on capex financing for new developments rather than portfolio buyouts.
- ABS: The study’s authors anticipate seeing increased asset-backed securities (ABS) issuances across Europe by data center operators during 2025.
- Complexity: M&A financing remains nuanced, with portfolio buyouts relatively rare despite the overall high demand.
7. Geographic Market Shifts
- Main Idea: Constraints in Tier 1 markets are driving interest and investment in Tier 2 and 3 markets.
- Context: Land, zoning and power limitations in major data center hubs are leading investors to explore secondary locations.
The Takeaway
The takeaway, as it so often is when assessing the outlook for data centers, is that the opportunities to capitalize on surging growth and demand in the space are limited only by the innovation, creativity, vision and resources of the operators, developers, technologists and investors in the space. As an added bonus, the shared need to find sustainable solutions for capacity constraints benefits many industries and communities beyond digital infrastructure around the world. It’s an exciting time to be riding this wave of digital infrastructure ingenuity and growth!
Many thanks to the global team of Partners from Norton Rose Fulbright for sharing their insights with us: Oliver Stacey, Mark Maurice, Kirsty Harrower, Daniel Metcalfe, Jessica Melville, Joris Ravelli, Dr. Valerian von Richthofen
