The privatization of data centers has begun

Blackstone’s $10bn bid for QTS Realty Trust is the first privatization bid for a data center operator. It will not be the last.

It was only a matter of time before private capital came calling for data centers at scale. It is having to hunt in the public markets.

This week, Blackstone launched a $10 billion take private of QTS Realty Trust. The firm is tapping several pools of capital, including its Infrastructure Partners platform and its non-traded investment trust, BREIT, to privatize the Kansas-based data center company.

Demand for data center strategies has been on the rise among institutional investors in recent years as a means of harnessing the tailwinds of digitization and the information economy. The sector’s outperformance during the height of the pandemic – a total return of 21 percent during 2020 versus -5 percent for the broader REIT market, according to the industry group NAREIT – only added urgency to groups looking for an entry into the space.

Yet, access to the sector has been limited. Some groups have built platforms, including Digital Bridge Holdings, which amassed $20 billion of data centers, cell towers and fiber networks before being acquired by Colony Capital in 2019. But for most managers, the road to data center investment has gone through established sector specialists. Before its QTS bid, Blackstone had been adding exposure to the space through a set of joint ventures with Corporate Office Properties Trust, a REIT focused on offices and data centers. Usually, it is the dominant pure play listed groups playing the role of gatekeeper.

There are reasons for this. The sector is highly specialized, expensive and operationally intensive. A light touch approach can be found by investing in so-called powered shells, in which end-users adopt day-to-day management of the properties – Blackstone’s partnership with COPT targets this part of the market. But the biggest platforms thrive on their operating expertise. Given the sensitive nature of data storage, reputation and track record factor in heavily for end users.

Still, these hurdles could only slow down the biggest pools of private capital for so long. With the acquisition of QTS, Blackstone would be poised to clear them all.

Further proof of digital real estate’s appeal came this week from Colony Capital. The firm announced it would rebrand as DigitalBridge, elevating the one-time acquisition target to the face of the franchise. The move comes after the $30 billion firm made meaningful exits from its legacy assets to bring its digital exposure to 80 percent of its holdings. Investors have rewarded this shift in strategy to the tune of $4 billion in the firm’s debut Digital Colony Partners fund in 2018, plus $4.5 billion so far for its successor, which is targeting $6 billion.

Investment demand is matched by a need for enhanced data storage capabilities globally. And while the industry leaders, Equinix and Digital Realty Trust, with market capitalizations of $74 billion and $45 billion, respectively, are likely untouchable, QTS is not the only listed platform within reach of private equity. Dallas-based CyrusOne has a market cap of roughly $10 billion and Denver’s CoreSite Realty is valued at $5.8 billion.

Blackstone has done the heavy lifting of putting together the first take-private bid for data centers, but momentum in the sector means more privatization is to come.