Higher Interest Rates Should Slow Digital Infra Investing

If interest rates remain high, or climb, for an extended period, transactions in the digital infrastructure space are going to slow down, since many deals are financed using borrowed money. The only issue is “how much will the deal flow slow?” 

The other issue is “how long will higher interest rates prevail?” Lower interest rates enable more transactions. 

Since the beginning of 2022, the private equity industry has finalized 92 data center transactions representing  $41.5 billion in deal value,, according to PitchBook data through August 25. 

Global Switch, which manages 13 data centers across Europe and Asia-Pacific, appears ready to join that list. According to Bloomberg, EQT, KKR and PAG are the final bidders for that asset. 

The $15 billion take-private of CyrusOne by KKR and Global Infrastructure Partners is by far the largest PE-backed data center deal this year.

Separately, Time dotCom has said it will sell part of its data center business to DigitalBridge. The sale of AIMS Data Centre appears to be part of a bigger expansion effort in Southeast Asia in conjunction with DigtalBridge. 

Between 2015 and 2018, private equity provided 42 percent of deal value in the data center sector, according to Synergy. Between 2019 and 2021 private equity share of the total deal value rose to 65 percent. 

In the first half of 2022, private equity deal reached more than 90 percent, according to Synergy analysts. 

But higher interest rates  should slow the pace of dealmaking, since debt is used to finance the deals, and debt is becoming more expensive. 

The longer term issue is exit strategy. Virtually all private equity assets are sold over a period ranging up to six years or so. So who are the eventual buyers? Public companies who prefer to operate businesses longer term, institutional investors with a longer time horizon or some strategic buyers, in some cases. 

Two decades, the quip often made was  that a software startups exit strategy was “we sell to Google.” In principle, hyperscalers could be buyers, though it seems more likely they also could be anchor tenants in markets where leasing makes more sense than building or buying.