Marcus Emadi | Director at Turning Point Capital
CONTENTS
Data Centres: The Cornerstone of the Digital Revolution
Data centres are fundamental to both the current and future digital economy. They are not just critical infrastructure; they are the backbone of modern technology, enabling everything from cloud computing to AI. But as the sector grows rapidly, questions around financing capacity and sustainability also arise.
One panellist aptly stated, “Data centres are not just the backbone of the digital economy—they are the architects of a sustainable future. But we all must work to ensure that the foundations they’re built on are just as robust as the services they provide.”
The demand for data centres is enormous, and it is expected to continue growing. At the Paris conference, polling revealed an expectation that data centre financing volumes will treble in size, with current volumes estimated at €60 billion—soon to rival the size of a mature leveraged loan market in Europe.
Do You See Opportunities and Challenges in Data Centre Financing
With new financing structures emerging, there are significant opportunities for those willing to embrace the market. However, these opportunities come with their own set of challenges, particularly around financing capacity and risk concentration.
- Capacity Challenge: The ability to absorb the financing needs of a rapidly growing sector will be tested as demand for DCs accelerates.
- Risk Concentration: As data centres become increasingly central to the digital economy, there is a risk of over-reliance on certain tenants or regions, which could present concentration risks for investors and lenders.
The LMA’s role in supporting this sector is critical. As data centres are complex hybrid structures—part infrastructure, part real estate, part technology—the LMA is working on standardised documentation and frameworks, sustainable financing practices, and fostering market awareness and diversification.
How Should Data Centres Be Financed?
A key question at the conference was how best to finance data centres. While the answer is nuanced, data centres can fit into several financing categories depending on their nature:
- Project Finance: This is the most common approach for standalone developments, especially hyperscale or greenfield data centres. Project finance structures are suited to data centres with long-term leases and predictable cash flows, helping mitigate risks associated with construction and operations.
- Infrastructure Finance: Given the strategic importance of data centres, particularly those that support government or critical infrastructure, infrastructure finance is also a potential route. Institutional investors looking for long-term, stable returns may find this approach appealing.
- Real Estate Finance: Some data centres, especially co-location facilities, resemble commercial real estate assets. Real estate investors are increasingly interested in these facilities, seeing them as a unique combination of property and business operations.
As Timo Buijs, Senior Director at ABN AMRO Bank, explained, “Data centres will likely evolve into a range of financing formats depending on lease agreements, shareholder background, and financing pools.”
Key Issues in Data Centre Financing
Several important topics were raised during the conference, including:
- Crypto and Mining: Despite the buzz, crypto mining currently accounts for less than 5% of global data centre capacity. However, the concentration of crypto activities in certain facilities can pose risks related to lease breaks, reputational issues, and ESG concerns. Many operators are diversifying away from serving crypto clients to improve financing opportunities.
- Tenant Concentration: Large cloud providers such as Amazon Web Services, Google Cloud, and Microsoft Azure dominate the tenant base for many data centres. While this offers stability, it also creates risks due to over-reliance on a small group of tenants. Diversifying tenant bases across various industries, such as media and cloud computing, can help mitigate these risks.
- Black Swan Events: The bankruptcy of a major tenant, while unlikely, would have significant implications for the digital landscape. The panel emphasized the importance of diversifying tenant portfolios to weather potential economic cycles.
Sustainability and Power Consumption
As the demand for data centres grows, so does their energy consumption. Today, data centres account for about 1% of global electricity consumption, with projections indicating that this could rise to 10% by 2030. This surge in energy demand presents several challenges for the sector, including sourcing power sustainably and managing capacity efficiently.
Potential solutions discussed included:
- Self-Generated Power: Hyperscale data centre companies are increasingly building their own substations and exploring alternative power sources, such as Small Modular Reactors.
- Renewable Energy: Hyperscale data centres are also the largest buyers of renewable energy, driving the sector toward greener solutions.
- Efficiency Improvements: Improving the efficiency of data centres and their energy infrastructure is essential, although it may not be enough to meet future demand.
The LMA’s ongoing work in supporting sustainable financing practices will be key to driving the sector towards more responsible energy consumption.
The Global Data Centre Market
The data centre market is expanding globally, with notable growth in regions like the Middle East and Africa. Government initiatives and rapid digital transformation are fueling investment in data centres in regions such as the Gulf Cooperation Council (GCC) and South Africa, helping bridge the digital divide and improve data sovereignty.
In Europe, the FLAPD markets (Frankfurt, London, Amsterdam, Paris, and Dublin) remain the largest and most significant market for data centres. However, with the global market expanding rapidly, regional growth is also becoming a key driver for innovation in data centre financing.
What’s Next for Data Centre Financing?
As the demand for data centres continues to grow, the market will require innovative financing solutions, strong risk management, and a focus on sustainability. The future of data centre financing will be shaped by a combination of factors, creating a dynamic and evolving landscape.
