Investing in the rising data centre economy


## **Introduction**

Data centers are crucial components of the digital economy, playing a crucial role in supporting the growth of the internet, cloud computing, big data, artificial intelligence, and other data-intensive applications. These facilities have attracted the attention of investors, who appreciate their steady and predictable cash flows, as well as their relatively low risk. This article examines the future of data centers and why investors should consider investing in them.

Data centers are essential to the digital economy, as they provide the infrastructure necessary to process, store, and distribute vast amounts of data. These facilities come in different forms, ranging from large hyperscale data centers owned by cloud vendors, to colocation centers leased by various companies. Despite their different models, data centers have become attractive investment opportunities for various investors, including private equity firms, infrastructure funds, real estate firms, and others.

In 2021, there were 209 data center deals with an aggregate value of more than $48 billion, which represented a 40 percent increase from 2020. The first half of 2022 saw 87 deals, worth $24 billion, with private equity buyers accounting for more than 90 percent of the deal value. This trend reflects the steady and predictable cash flows that data centers generate, making them appealing to long-term investors seeking relatively low-risk investments.

![Bar chart displaying the data center market's value from 2018 to 2028 in USD Billion](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Investing%20in%20the%20rising%20data%20centre%20economy/data-center-market-2018-2028-usd-billion-min.webp)

However, there are potential risks to investing in data centers, such as higher interest rates that increase the cost of funding deals. Moreover, cloud vendors such as Amazon Web Services and Google Cloud, who are major customers for colocation companies, are increasingly signing shorter-term contracts and are in a strong position to demand favorable leasing terms. Additionally, their strategy of owning and building their own world-class centers may reduce their dependence on colocation companies, making the market open to other competitors, such as real estate firms.

Despite these challenges, data centers remain a valuable investment opportunity, particularly for investors who consider the upstream opportunities in a complex value chain. Data centers have four main components, namely the facility itself, the mechanical, electrical, and plumbing gear, the IT hardware, and the software. Additionally, there are opportunities in data center operations, management of facilities and IT services, power, and connectivity. Potential investments lie across this value chain, with high demand in four areas where innovation is especially likely to create value.

The first area is sustainable or green energy. Data centers are big energy consumers, and pressure to make them sustainable is high, with some regulators and governments imposing sustainability standards on newly built data centers. The use of renewable energy is critical to the hyperscalers' strategies, and they have committed to using only carbon-free energy by 2030. To reach carbon-free energy goals, data center owners are signing power purchase agreements (PPAs) with suppliers of renewable energy. Hyperscalers are also starting to fund the building of renewable-energy plants to supplement power from renewable PPAs.

The second area is edge computing. This technology involves bringing computing closer to where data is generated, rather than sending data to centralized data centers. It enables faster processing of data and reduces network latency, which is essential for applications such as autonomous vehicles, virtual reality, and augmented reality. The potential of edge computing is enormous, with the global edge computing market expected to reach $250.6 billion by 2024. Investors who can identify early-stage edge computing companies with promising technologies and business models can create significant value.

The third area is artificial intelligence (AI). AI is transforming the way data centers operate, making them more efficient and cost-effective. For example, AI can predict equipment failures and initiate proactive maintenance to avoid downtime. AI can also optimize the energy consumption of data centers by dynamically adjusting cooling and power supply to match demand. Data center operators that

## **How 5G networks function and how data centers can prepare to meet the demands of this new technology**

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5G networks have been the talk of the tech industry for some time now, with many touting the new technology's ability to provide faster speeds, lower latency, and increased capacity for mobile and IoT devices. But what impact will 5G have on data centers? In short, a significant one. With 5G networks processing, storing, and distributing massive amounts of data, data centers must adapt to support these new technologies.

5G networks are designed to connect everyone and everything, regardless of location, and offer improved peak data speeds, lower latency, increased reliability, network capacity, and availability. 5G networks use virtualized and software-driven architectures to allow users and devices to stay connected as they move between connections, without re-authenticating or changing any settings. This technology enables new applications such as autonomous vehicles, virtual reality, and massive IoT.

![Pie graph illustrating the distribution of investment in 5G technology](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Investing%20in%20the%20rising%20data%20centre%20economy/investment-attributable-to-5g-min.webp)

5G networks have two main components: the radio access layer (RAN) and the core network layer. The RAN consists of 5G small cells and macrocells that individual devices connect to, such as base stations, routers, smartphones, or autonomous vehicles. Clusters of small cells use high-speed, high-band spectrum that can only travel short distances, while macrocells use multiple input, multiple output (MIMO) antennas to provide wide-area coverage to devices and small cells. Macrocells enable multiple connections to send and receive large amounts of data simultaneously, so more users can connect at once.

The core network layer comprises all the back-end technologies and software that manage the data and internet connections for the 5G network, including beamforming, authentication and access control, user plan functions, and session management. This coordination requires powerful computing systems and architectures, such as cloud-based systems, machine learning, and AI.

The large amount of data that 5G networks must process, store, and distribute can create a strain on data centers. Many data center operators have taken a wait-and-see approach when it comes to 5G rollout, as existing architectures have flexibility built in that can handle the increased demand for computing capacity, storage, connectivity, and edge computing support. Some networking hardware and software have already upgraded to be faster and more efficient, with containerization and virtualization leading the way. These technologies already support the increased 4G usage and can scale up to handle the existing 5G networking infrastructure.

![Bar chart depicting the size of the North America data center as a service market](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Investing%20in%20the%20rising%20data%20centre%20economy/north-america-data-center-as-a-service-market-min.webp)

Data center operators should prepare for increasing 5G networking demands in the future. Cisco reports that 5G will support more than 10% of the world's mobile connections by 2023, with an average speed of 575 Mbps, which is 13 times faster than the average mobile connection today. Data centers can increase their lifecycle upgrade processes by replacing simpler networking hardware, such as switches and routers, with 5G-capable ones. They can investigate 5G's effects on existing technologies, such as network functions virtualization and software-defined networking, to ensure they can handle the increased workload.

Data center operators should also learn more about the Open RAN standards used by global network operators and the key OEM vendors. Newer, more nimble networking vendors often use Open RAN standards in their 5G technologies, which drives business away from traditional vendors. Data center operators and staff will need to be more familiar with such standards if they wish to stay relevant in the 5G landscape. That includes increasing training and certifications for internal staff and hiring external resources with relevant expertise.

In conclusion, data centers must prepare for the rise of 5G networking by understanding how it functions, upgrading crucial infrastructure, and understanding how 5G networks can benefit them. They must devise new architectural approaches to handle

## Seven likely trends for the future of data centers:

- IT equipment is becoming hotter every 18 months, which is resulting in problems that get worse over time. To deal with this, data center designers will need to build in unused cooling capacity to support future equipment or design data centers that can easily accommodate an expensive cooling refit every few years.
- Data center construction takes years, and with supply chain uncertainty, it might be getting worse. The industry is beginning to turn toward pre-assembling data center components in factories and then shipping them to sites to accelerate construction.
- There will be more demand for resource consumption efficiency. Innovative designs can be built with fewer raw materials, and improved cooling technologies reduce electricity consumption. Corporate ESG initiatives require sustainable energy and water consumption.
- People will have to design and build with weather unpredictability in mind. Designers and operators are already assessing the need to retrofit or decommission old data centers because they simply cannot cope with new weather extremes.
- There's increasing demand for small data centers, and edge computing will be essential to support IoT and other emerging technologies. The rise of 5G and autonomous vehicles will also drive the need for edge computing.
- The use of renewable energy in data centers is growing, and many organizations are targeting 100% renewable energy usage. Hydrogen fuel cells, solar power, and wind power are all being used in data centers.

Artificial intelligence (AI) and machine learning (ML) will play a bigger role in data center management, optimizing energy consumption and reducing costs. AI and ML will also help to identify and prevent potential problems before they occur.

![Chart illustrating the projected annual growth of US data center demand, expected to reach 10 percent by 2030](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Investing%20in%20the%20rising%20data%20centre%20economy/us-data-center-demand-is-forecast-to-grow-by-some-10-percent-a-year-until-2030.-min.webp)

## **Why Invest in Data Centers?**

Investing in data centers is a smart decision for businesses looking to establish a strong digital presence. Data centers provide the infrastructure necessary to process, store, and distribute vast amounts of data, making them critical components of the digital economy. These facilities have become increasingly attractive to investors due to their steady and predictable cash flows, as well as their relatively low risk. Moreover, data centers are essential for supporting the growth of the internet, cloud computing, big data, artificial intelligence, and other data-intensive applications.

Investing in data centers allows companies to ensure that they have the necessary computing power and storage capacity to support their digital initiatives, which is essential for maintaining a competitive edge in today's market. With the increasing demand for data and digital services, investing in data centers provides a stable source of revenue that can withstand economic downturns. Furthermore, investing in sustainable and efficient data centers can also help companies meet their corporate social responsibility goals, as they are environmentally friendly and contribute to reducing the carbon footprint. Overall, investing in data centers is a wise decision that can lead to long-term benefits and help businesses stay ahead of the digital curve.

## **Conclusion**

Data centers are becoming increasingly important in the global digital economy. They offer steady cash flows, long-term leases, and the potential for attractive risk-adjusted yields. While there are some limitations to investing in data centers, there are many opportunities to create value across the data center value chain. Sustainable energy, digital services, and artificial intelligence are just a few areas where investors can find attractive opportunities. With the demand for data and digital services set to continue growing, data center investing is likely to remain an attractive option for private equity buyers.


Data centers play a crucial role in supporting the growth of the digital economy by providing the infrastructure necessary to process, store, and distribute vast amounts of data. Investors are increasingly drawn to data centers due to their steady and predictable cash flows, relatively low risk, and attractive yields compared to traditional investments. The rise of digital streaming, edge computing, and artificial intelligence further enhances the importance of data centers in the market. Investing in data centers allows businesses to ensure they have the necessary computing power and storage capacity to stay competitive in the digital age. Moreover, data center investments align with corporate social responsibility goals as they contribute to reducing the carbon footprint. As the demand for data and digital services continues to grow, data center investing remains an appealing option for investors seeking stable returns and long-term benefits.

Investing in the rising data centre economy

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