Investment in data centres surges, ABS gaining traction

The global investment surge in data centres shows no signs of abating, as indicated by recent figures compiled by the global law firm Linklaters. The sector saw a substantial investment of USD $36 billion last year and has already attracted USD $22 billion in the first five months of the current year. This growing appetite for data centres is pushing financial strategies to adapt, notably with the adoption of asset-backed securitisations (ABS) as a cost-effective method to refinance existing bank debt.

The ABS market in the United States has notably rebounded in 2023, demonstrating the sector's resilience and adaptability. According to Linklaters' analysis, USD $5.4 billion in securities backed by data centre revenues were issued in 2023, with an additional USD $3.7 billion issued within the first five months of 2024. Since 2018, data centres in North America alone have seen over USD $21 billion in ABS issuance, underscoring the growing role this financing method is expected to play in the sector's lifecycle.

Europe, although historically lagging behind North America in data centre investments, is rapidly catching up. North America dominated global investment, holding 62% of the total in 2023 and commanding 69% of the investments so far in 2024, which translates to USD $15 billion. However, Europe’s market share has increased significantly from 6% in 2022 to 20% in 2023. So far in 2024, European data centres have attracted over USD $7 billion, accounting for 29% of the global market share.

A key milestone was reached this week with the issuance of the first EMEA (Europe, the Middle East, and Africa) data centre ABS. Lawyers foresee this as just the beginning for the ABS market within Europe’s data centre sector. Europe’s unique multi-jurisdictional legal landscape remains a significant consideration, but the successful implementation of pan-European ABS platforms in other sectors is seen as a positive precedent. Industry experts predict further ABS uptake as data centre deals mature and owners seek to optimise financing and unlock capital.

Elisabeth Johnson, Structured Finance Partner at Linklaters in London, remarked, "Data centres have been the target of significant global investment, with appetite growing substantially within Europe. We're at the edge of witnessing asset-backed securitisations in Europe pick up pace as these ventures mature. This is an exciting time for the industry, where strategic financing structures will pave the way for the next wave of digital infrastructure expansion."

Patrice Doat, Structured Finance Partner at Linklaters in Paris, added, "Data centres have become an attractive asset class with predictable cash flows, making them ideal candidates for ABS. France, with its strategic location and strong regulatory framework, offers an attractive environment for such financing structures. Navigating specific legal and regulatory considerations, including EU securitisation regulations and French commercial real estate laws, will be essential for fully leveraging ABS in this sector."

Barbara Lauer, Capital Markets Partner at Linklaters in Frankfurt, highlighted the technological drivers behind the sector's growth. "Data centres have seen exponential growth, driven by advancements in technology and market trends such as the popularity of AI and the need for cloud-based storage. As the sector matures, ABS has potential to become an additional funding source, enhancing liquidity and potentially lowering capital costs," she noted.

Linklaters has positioned itself at the forefront of the evolving digital infrastructure sector. The firm's involvement spans data centres, fibre, towers, and satellites, among other assets. Recent landmark deals include advising Ardian on the acquisition of the data centre platform Verne and assisting EXA Infrastructure in selling seven edge data centres across Europe.