KBS - Digital Infrastructure and Data Centres - Market Insight

MARKET INSIGHT - DIGITAL INFRASTRUCTURE AND DATA CENTRES

M&A ACTIVITY CONTINUES TO RISE WITHIN UK DIGITAL INFRASTRUCTURE

During the past five years, Digital Infrastructure M&A has focused heavily on services and complementary businesses relative to Data Center operations. This activity remains on an upward trend, while private equity involvement in edge data centres is also rapidly growing. There are a number of reasons for this surge in growth and acquisition appetite, with the main focus due to anticipated increase in demand for cloud computing and data center services, alongside growth in the availability of data center assets. On the latter, we are seeing the rise of edge data centres. According to sector research, hyperscale data centers remain important, but future demand requires ‘low latency’ solutions that minimise latency, jitter and enable real-time automated responses. As demand for edge data centers continues to grow, we are seeing larger players start to acquire smaller facilities, as well as ongoing consolidation, with a number of current players look to expand their portfolios.

On the demand-side, three key trends are driving this:

1. Digitalisation of business activities, including the use of Artificial Intelligence (AI); 2. Economic pressures on businesses creating a focus on reducing IT costs; 3. Increasing use of streaming and internet services globally.

Private equity investment has been pivotal in the recent development of this market space, seeing most data center investments as “safe havens”, and typically deploying capital through larger funds that have longer-term investment horizons, compared to those of the broader private equity space. This sector space benefits from progressive and non-cyclical growth, therefore, it remains a very attractive and resilient target space for prospective acquirers and investors, particularly private equity, infrastructure investors and real estate/strong asset funds.

Insight from market research suggests that the U.K. data center market generated revenue of USD 7,921.6mn in 2023 , which is expected to witness a CAGR of 2.4% during 2024 – 2030 , to reach USD 9,324.6mn by 2030.

Market Revenue (USD Million)

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The rampant adoption of cloud-based solutions and services due to the benefits they offer to organisations, such as increased efficiencies, modernisation of IT infrastructure and improved data security, has resulted in substantial growth in the data center market. According to a government agency, the UK is one of the largest markets for cloud solutions and services in Europe, with revenue from public cloud services amounting to more than USD 10bn in 2022.

KEY INVESTMENT DRIVERS

• The strategic rollout of 5G network connectivity is a key focus in the UK, spearheaded by major telecom operators, including EE, Vodafone, Ericsson, Three UK, and O2. Complementing these efforts, the UK government has initiated projects such as 5G Logistics, 5G Ports, Smart Junctions 5G, AMC2, 5G CAL, 5G Factory of The Future, and 5GEM-UK. • In May 2023, Kao Data unveiled its plans to construct a 40 MW data center in Manchester’s Kenwood Point for a projected investment of $440 million ; the facility is set to go live in late 2025. The strategic move into Manchester aligns with Kao Data’s commitment to advancing the region’s computing capabilities and supporting the aspirations of the UK government. • The UK government is actively promoting digital infrastructure through projects like the Wireless Infrastructure Strategy, aimed at increasing wireless connectivity by 2030, and the Digital Strategy, outlining comprehensive digital policy across critical domains. • Some factors aren’t specific to the UK. One reason is the increasing take-up of cloud-based software. One source assesses global growth here at 18% . Another factor is the Internet of Things; there are currently 13 billion Internet-connected devices , a number expected to double by 2030. • Contractual structures are increasing in sophistication, with newer options such as colocation growing; this means the situation where those who own the servers rent space rather than operating their own facility. New centres dedicated to colocation are increasingly seen.

DEAL ACTIVITY The below graph shows the volume of data centre transactions over the last 10 years (2013 – 2023) in Europe, showing a continuous increase in the amount of data centers that are acquired. As a rise in the demand for data centers increases, so does the demand for the various companies that provide products and services into this growing area of the market.

Volume of Data Centre Deals in Europe

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NUBIS ACQUIRED BY TEQNION [KBS DEAL]: KBS Corporate has completed its third company sale to Swedish industrial group Teqnion within nine months, the latest being Cambridge-based Nubis Solutions. Nubis was established in 2008 and creates innovative temperature control systems to optimise performance, increase operating efficiency and reduce carbon footprint. BLACK & WHITE ACQUIRED BY WATERLAND PE [KBS DEAL]: KBS Corporate has overseen a major investment into Black & White Engineering from private equity company Waterland. Black & White, founded in 2007, is a multi-award-winning global engineering consultancy which works with 110 clients across 23 countries, delivering innovative and high-quality MEP (mechanical, electrical and plumbing) design engineering solutions for a wide range of industries.

CONCERT ACQUIRED BY RIDGE: Concert, a London based firm of project managers, cost management and health & safety consultants, brings considerable capability and credibility in the data center and commercial markets to Ridge, who have identified these as key growth areas in their strategy.

SKAE POWER SOLUTIONS ACQUIRED BY JLL: SKAE Power Solutions (SKAE), a New York-based provider of data center technical and project management services. This acquisition of SKAE enables JLL to provide solutions across the full data center lifecycle and adds significant technical depth to its existing offerings. 2BM LIMITED ACQUIRED BY KEYSOURCE: Keysource, a global specialist leader in sustainable data center solutions and strategic advisory services, announced the acquisition of 2bm Limited, a specialist data center and critical environment company with headquarters in Nottingham, UK. With over 20 years of experience, 2bm has established itself as a trusted expert in the industry, offering cutting-edge solutions tailored to the unique needs of its clients. SLOUGH DATA CENTRE ACQUIRED BY DIGITAL REALTY: Digital Realty has announced the acquisition of a highly connected colocation data center in the Slough Trading Estate for US$200m. This acquisition marks the company’s entry into the west London submarket and provides additional support to existing colocation capabilities in the City and Docklands. PRISM DATA CENTRE SOLUTIONS ACQUIRED BY LEVITON MANUFACTURING: Leviton Manufacturing Co., Inc, a New York-based global manufacturing business, acquired Prism DCS, a UK-based manufacturer of network enclosures. Prism DCS is a specialist data center solutions provider specialising in the design, manufacture and installation of bespoke solutions including hot and cold aisle containment solutions, security caging and data center cabinets.

M&A STATISTICS

Investments in data centers were in decline between 2017 to 2019, but have since been followed by steep growth over the past three years. It reached nearly $200bn by end of 2022 , with nearly half of that volume concentrated in the last two years. Nevertheless, the average deal size for data center transactions nearly tripled from $80m in 2018 to approximately $235m in 2022 . In 2021, the global number of data center investment deals peaked at 215, showcasing investors’ appetite to grab share in the rapidly expanding digital infrastructure sector. The total value of M&A investments in 2022 remained nearly the same as the year before, largely driven by growing private equity interest. In 2020, private equity accounted for 55% of the value of total data center closed deals in the year, rising to 66% in 2021 and 91% in 2022 . Since 2018, private equity funding has grown by 50% year on-year , on average, reaching $44 billion in total value in 2022.

A 2024 report by Saville’s stated that 26 M&A deals were transacted last year, against 22 in 2022 and 24 in 2021, witnessing the sector’s resilience. Data centers are increasingly perceived as secure long-term investments with strong potential returns (typically 10%+), leading to heightened sponsor interest. Private equity (PE) or PE-backed operators have dominated transactions since 2021, with private transactions taking some major data center players out of the public market. Financial sponsors, including PE funds, real estate funds, and infrastructure investors, have been instrumental in the industry’s growth, providing both capital and strategic guidance.