The rapid growth of cloud computing and AI has created compelling tailwinds for data centres, and institutional capital has followed. Investors should match their route into, and out of, data centres to their own scale and liquidity needs. Despite the asset class’s strong long-term prospects, it will not suit every portfolio, and for some the right choice is to hold back for now.
Our new paper, Data centres: Navigating a fluid asset class, draws on expert interviews with investors, fund managers, developers and operators, representing over €1trn in total alternatives AUM. Its findings on liquidity and routes to market show that exit strategy deserves as much, if not more, attention as the decision to invest.
Capability is still being built
In Europe, institutional interest in data centres has grown faster than the capability to underwrite and manage these assets. Their value depends above all on power availability, the timing of grid connections and planning approvals, while tenant quality and technological change are key risks. Assessing these factors calls for a complex skill set that most real estate investors do not naturally have in-house and that many are still building.
Liquidity and exit risk in data centres differ from those in traditional real estate because of the specialised nature of the assets, the substantial capital required, high concentration risk and a relatively limited pool of potential buyers.
Strong demand and growing institutional interest may support exit opportunities. Investors should not assume, however, that sector-wide demand will translate into liquidity for every asset or strategy. Liquidity is generally stronger in established, high-demand markets, where a broader pool of buyers can provide greater depth at exit. As assets grow in scale and capital requirements, the number of potential buyers for individual assets may shrink. Investors and hyperscalers themselves will focus on more diverse ways of accessing the market. Liquidity and diversification are therefore likely to become increasingly important considerations when assessing data centre investment strategies.
Ticket size shapes the options
The sector’s capital intensity is a challenge in its own right. Ticket sizes in data centres are large, and the scale of investment required influences both the routes to market open to an investor and the level of expertise they will need.
For smaller and mid-sized investors, this creates a concentration problem. A single direct asset can quickly lead to over-allocation and high concentration risk, leaving a portfolio heavily exposed. Some investors are reducing this risk through open-ended funds and listed vehicles, which limit exposure to any single large-ticket investment.
Weighing up the routes to market
Each route into the sector carries a different balance of control, liquidity and risk. The right choice depends on an investor’s available capital, desired exposure and organisational edge.
Investors with the long-term commitment, expertise and capital to see projects through are best placed to pursue direct ownership or joint ventures, which offer greater control but tie up more capital and internal resources. Building the necessary capability is a substantial undertaking, and some established managers have concluded that their natural role is to work alongside developers and operators with the specialist skills on the ground, rather than replicate those skills in-house.
Investors without the necessary expertise can gain exposure through specialist managers and funds. These provide access to diversified data centre portfolios and established development and operating platforms that would be difficult to build through direct investment. They also offer some liquidity, although non-listed vehicles can mean longer holding periods and limited exit flexibility, depending on their structure.
Manager selection is critical. Scale, track record and a clear strategy are essential, and investors should look closely at where in the data centre lifecycle a manager creates value and whether it has the capabilities to deliver on its strategy.
Where liquidity is the priority, listed market may suit smaller investors. That liquidity comes with exposure to equity market volatility, and the number of listed European data centre operators remains limited.
Guarding against fear of missing out
Investors should resist treating data centres as an asset class that every institutional portfolio must hold. For some smaller and mid-sized investors, indirect exposure may be more appropriate, and for others limited or no allocation may remain the right decision, at least for now.
Investors should guard against fear of missing out. Strong demand growth and structural tailwinds may support the long-term case for the sector, but on their own they are not a sufficient reason to deploy capital into data centres. The relevant test is whether the sector’s risk and return characteristics suit the portfolio.
The sector is also still finding its place in institutional portfolios. One interviewee for the paper described data centres cycling from private equity to infrastructure, then real estate and back again. As the European market evolves and institutional participation broadens, the central question for investors will increasingly be the appropriate scale and route of their exposure. The exit route needs to be considered and understood well before the allocation is made.
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