Striking it rich with data centers

Happy Monday. Here’s what we’ve got today…

• A look at private equity’s growing interest in data centers

• The deal sheet, plus China’s market rescue package

The artificial intelligence gold rush is having one of its first “picks and shovels” moments: data centers.

Last week, Starwood Capital Group, Barry Sternlicht’s $115 billion AUM real estate-focused investment firm, announced the launch of Starwood Digital Ventures, a dedicated platform for the group’s data center investment strategy.

The launch builds on Starwood’s previous work in the space, having deployed more than $8 billion to data center development over the past five years—making it one of the largest privately held developers in the U.S. and E.U.

Starwood’s Growing Data Center Play

While Starwood Digital Ventures isn’t launching with its own fund, Starwood did say the platform will receive specific allocations from the firm’s other vehicles—the first time that the firm is setting aside a dedicated pool of capital for the strategy.

The first portion of that funding is likely coming from the firm’s Distressed Opportunity Fund XIII. Fundraising for the vehicle launched last year with a $10 billion target, and, at the time, Starwood said it would allocate 20 to 30 percent of that total to its data center initiative.

Despite the fund’s name, Starwood doesn’t plan on specifically targeting distressed data centers. Instead, it’s looking for a mix of new developments, acquisitions, and partnerships with existing operators.

Starwood hasn’t yet said which other entities would provide funding to the Digital Ventures platform alongside the initial $2 to $3 billion.

A Hot Market With More Yet to Come

It’s a strategy that makes a lot of sense: “Data Centers are seeing the strongest supply/demand backdrop, in favor of landlords, since the early days of the social media explosion,” says Jefferies equity research analyst Jonathan Petersen. “Supply constraints are limiting the ability to meet demand, and rents are rapidly rising as a result.”

Much of that is thanks to the emergence of resource-intensive artificial intelligence applications. And, while the AI boom is well underway, it’s probably still relatively early in the investment cycle.

Current demand is centered around the support of AI model training activities, with data center customers spending big to develop resource-intensive generative AI models. Behind the initial training spend, however, is the much larger AI inferencing opportunity, which could be more than five times the size of the training market.

In any case, the AI growth story also has a more nuanced impact on data center market dynamics than a simple increase in capacity utilization.

Historically, many data centers have focused on a co-location offering, in which enterprise customers can shift their existing workloads to a low-cost third-party provider (the data center). AI use cases, on the other hand, require more specialized infrastructure that can handle high-intensity workloads. They also require low-latency interconnectivity, or data centers that can provide faster connections thanks to their physical proximity to network-dense population centers.

“Fundamentally, supporting accelerating AI/ML adoption requires more power and cooling than much of the existing data center inventory can accommodate,” says commercial property consultancy Newmark. “Not all existing data centers lend themselves to retrofitting, catalyzing demand for new product in both existing and emerging markets.”

To industry observers, it’s about as close to a generational opportunity as you can get. Jonathan Schildkraut, an SVP at Compass Datacenters, believes we’re now seeing "an incredibly unique convergence of two data center investment trends." He adds, "Specifically, we are seeing improving returns on capital at the same time as the risk associated with capital deployment is falling."

It’s the most favorable set of conditions the industry has ever seen, says Schildkraur. "More capital than ever before, 70 to 85 percent of expected spend, is being deployed while attached to known and committed demand."

Starwood Not the Only Firm Getting Involved

Starwood’s new platform is the latest public commitment to the strategy, but it’s far from the only investment firm active in the space.

GI Partners, Brookfield, KKR, and BlackRock’s newly-acquired Global Infrastructure Partners have all been expanding their data center footprint.

That’s not to mention DigitalBridge, formerly Colony Capital, which holds six separate data center platforms in its portfolio. That includes 32-location Vantage Data Centers, which earlier this year received $8 billion in new equity funding from Digital Bridge, AustralianSuper, and Silver Lake (which had sold Vantage to DigitalBridge in 2017). At the time of the latest investment, Vantage announced plans to invest more than $30 billion in new capacity development.

EQT is also doubling down. The firm acquired data center provider EdgeConnex in 2020 via its EQT Infrastructure IV and EQT Infrastructure V funds. This month, it announced it was contributing yet more money through its sixth infrastructure fund to focus on the development of next-generation facilities—supporting what the firm believes is an AI-induced need for industry capacity to triple by 2030.

Digging Out of a Hole

Starwood will be hoping that the launch of its Digital Ventures platform can provide some welcome uplift as it fields criticism for lackluster performance in recent years.

With a disjointed post-pandemic real estate market (and higher interest rates), Starwood has had to foreclose on a number of properties across its lending portfolio.

In late 2022, the firm had a default of its own after failing to make a payment on an $800 million hotel portfolio loan. It eventually reached an agreement with creditors, though was forced to contribute additional equity.

This summer, Starwood also defaulted on a $213 million loan backing an Atlanta office building, whose vacancy rate had jumped from a pre-pandemic 13 percent to nearly 40 percent.

But, for Starwood Digital Ventures, the most pressing near-term problems will be standing up enough capacity.

• Sony has terminated its $10 billion deal to acquire Zee Entertainment over a disagreement on go-forward executive leadership.

• Macy's (NYSE: M) has rejected a $5.8 billion takeover offer from Arkhouse and Brigade Capital Management.

• HitecVision is preparing to sell Sval Energi, an oil exploration and production company focused on the Norwegian continental shelf, for up to $1 billion.

• Sunoco (NYSE: SUN) has agreed to acquire NuStar Energy (NYSE: NS) for $7.3 billion.

• La Française des Jeux has made a $2.7 billion offer to acquire Kindred Group, an online gambling company.

• The Italian government is preparing to sell a 20 percent stake in state-owned postal services operator Poste Italiane for around €2.25 billion.

• Brookfield Asset Management is in talks over a $2 billion investment in GEMS Education, a Dubai-based private schools business.

• Compass Group has agreed to acquire CH&CO, a catering business, from Equistone Partners for £475 million.

• Octopus Energy, backed by Origin Energy, Tokyo Gas, Generation Investment Management, and CPP Investments, has invested £200 million in Deep Green, a renewable energy solutions company.

• DFW Capital Partners acquired Harris CPAs, a provider of accounting and financial services.

• General Atlantic and CEO Adrian Binks agreed to acquire a portion of Hg's stake in Argus Media Group, a London-based energy and commodities data provider.

• Knox Lane acquired a majority stake in Guardian Fire Protection Services, a provider of fire safety systems.

• Martis Capital and Din Ventures invested in Archway Dental, a dental service organization.

• Blackstone acquired a minority stake in Salas O'Brien, an engineering and facilities services firm.

• PointClickCare, backed by Hellman & Friedman and Dragoneer, acquired American HealthTech, a provider of EHR and financial management solutions, from Computer Programs and Systems.

• Chevron (NYSE: CVX) is preparing to sell its natural gas assets in the Duvernay Shale.

• Crédit Agricole acquired a 7 percent stake in Worldline, a European payment and transaction services firm.

• Sandoz agreed to acquire Cimerli, a biosimilar developed by Coherus BioSciences (Nasdaq: CHRS), for $170 million.

• Stellantis has agreed to acquire a 70 percent stake in DPaschoal, a Brazilian auto parts maker.

• Apollo Global is considering a bid for National Amusements.

• Synchrony Financial (NYSE: SYF) has agreed to acquire Ally Financial's point-of-sale financing business.

• BrightSpring Health Services, backed by KKR, is expected to price its IPO this week, seeking to raise up to $1.4 billion in proceeds.

Tech, Vertical SaaS, & Misc. Enterprise

• Valsoft, a Canadian vertical market software investor, raised $170 million in growth funding led by Coatue and Viking Global.

• Oleria, a Seattle-based cybersecurity startup, raised $33.1 million in Series A funding. The round was led by Evolution Equity Partners, with participation from Salesforce Ventures, Tapestry VC, and Zscaler.

• Runnr.ai, a provider of AI-driven messaging software for hotel operations, raised €1 million from Arches Capital.

Fintech

• DailyPay, a provider of an on-demand pay platform, raised $75 million in new equity funding led by Carrick Capital Partners and $100 million of debt funding from Citi.

Consumer & Media

• ElevenLabs, an AI speech generation software, raised $80 million in Series B funding. Andreessen Horowitz, Nat Friedman, and Daniel Gross co-led, with participation from Sequoia Capital, SV Angel, Smash Capital, BroadLight Capital, and Credo Ventures.

Healthcare & Life Sciences

• Tr1X, a San Diego-based biotech developing regulatory T-cell therapies, raised $75 million. The Column Group, NEVA SGR, and Alexandria Ventures co-led.

• Sano Genetics, developing a platform for precision medicine clinical trials, raised $11.4 million in new funding led by MMC Ventures, with participation from Episode 1 and Seedcamp.

Industrials, Greentech, & Other

• Captura, a developer of ocean-based carbon capture technology, raised $21.5 million from Future Planet Capital, with participation from Maersk Growth, Eni Next, and EDP Ventures, among others.

• AquaExchange, an aquaculture technology startup, raised $6 million in funding led by Ocean 14 Capital, with participation from Endiya Partners.

• Shamba Pride, a Kenyan agtech, raised $1.7 million in new equity funding. Seedstars Africa Ventures led, with participation from Gray Matters Capital.

• Macquarie raised €8 billion for an EU-focused infrastructure fund.

• Wynnchurch Capital raised $3.5 billion for its sixth middle market fund.

• J.P. Morgan is planning to raise up to $3 billion in new private credit commitments.

• ArcTern Ventures raised $335 million for its latest climate-focused fund.

• Bain Capital raised $1 billion for a new middle market private credit fund.

1. China considers stock market rescue package.

• Premier Li Qiang calls for “forceful” steps to shore up domestic market. — China Weighs Stock Market Rescue Package Backed by $278 Billion

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