KKR, Warburg plough into Asia data centres on AI, cloud boom

HONG KONG – Asia is becoming the latest hunting ground for global investors in data centres, as companies from KKR & Co to Bain Capital bet on the region’s growing computing and data storage needs following an artificial intelligence (AI) boom.

Like in the United States, Asia is seeing a surge in demand for data centres as giants like Amazon.com and Alphabet’s Google boost cloud services, the recent generative AI wave fuels data and capacity requirements, and the region’s growing population spurs storage needs.

Demand in South-east Asia and North Asia is expected to expand about 25 per cent a year through 2028, according to Cushman & Wakefield data. That compares with 14 per cent a year in the US.

“It’s the US first and then the trend tends to follow soon after into Europe and with a little time lag into the Asia-Pacific,” said Mr Udhay Mathialagan, global head of Brookfield Asset Management’s data centre business.

While it is a diverse region, the one thing in common in Asia is that everyone is online, he said. “You need phenomenal amounts of connectivity and really good data centres.”

Investors have already made moves. Bain Capital announced a deal in August to take Beijing-based data centre business Chindata Group Holdings private with an implied equity value of US$3.2 billion (S$4.3 billion). In September, KKR & Co agreed to acquire a 20 per cent stake in Singtel’s regional data centre business for about US$800 million. Blackstone announced the launch of its first wholly owned data centre platform in Asia in November 2022.

Including the Singtel platform, KKR sees the potential to invest US$1 billion in equity on data centre projects in the Asia-Pacific region in coming years, said Mr Projesh Banerjea, the firm’s director of infrastructure. Returns for such investments are in line with targets for KKR’s infrastructure strategy, which are in the mid-to-high teens, he said in an interview.

The bet is that Asia will eventually provide a bigger slice of the pie. About 29 per cent of so-called hyper-scale cloud revenue – used in the industry as a proxy for market growth – is generated from the Asia-Pacific versus 49 per cent from the US, according to Cushman & Wakefield. By 2028, Asia’s share is expected to increase to as much as 33 per cent, or US$173 billion.

“This is a super-easy investment story,” said Mr Morgan Laughlin, global head of data centre investments at PGIM. “You have demand, which is growing with no end in sight, and you’ve got supply becoming increasingly constrained with no solution in sight.”

PGIM plans to invest as much as US$3 billion in the global data centre sector over the next three years, including in major Asia-Pacific markets, said Mr Laughlin. The company has been negotiating for sites in Tokyo and Seoul, according to a person familiar with the matter. PGIM declined to reveal the location.

Bain Capital will continue to invest in China and South-east Asian markets, as well as look for opportunities in developed regions elsewhere in Asia, Mr Jonathan Zhu, partner and co-head of the firm’s Asia private equity business, said by e-mail.

“Driven by cloud and AI, the entire Asia market will continue to grow,” Mr Zhu said. That will “ramp up the competition for assets and resources.”

There are challenges. Data centre development is time-consuming and complex – requiring a mix of expertise around real estate, technology, local regulations and environmental requirements. Asia’s highly fragmented market makes navigating these factors even more onerous.

China has proposed easing cross-border data controls after tightening its grip in recent years, although rules there remain vague. The Singapore authorities lifted a moratorium on data centre construction in 2022 but remain selective about awarding projects, investors interviewed said, and the country has published standards for operators to ensure energy efficiency.

Warburg Pincus, through its portfolio Princeton Digital Group, has a presence in six markets and is looking for opportunities in existing and new locations, said Ms Ellen Ng, its co-head of Asia real estate.

As part of its environmental, social, and corporate governance strategy, it has also expanded to Malaysia’s Johor and Batam in Indonesia to serve Singapore as it imports most of its energy and has fewer renewable power options. Warburg’s investment in the sector in Asia has totalled almost US$1 billion, she said.

Data centres are also racing to improve their cooling systems, which have come under pressure from increased use of graphics processing units to handle a surge in complex computation demands from areas such as AI.

GPUs consume more power and emit more heat than central processing units, the primary component of computing engines.

In October, a fault in the cooling system of data centre operator Equinix affected 2.5 million payment and ATM transactions of DBS Group Holdings and Citigroup. DBS, Singapore’s largest bank, was later banned from acquiring new business ventures for six months. Singapore’s Government also said it will study how to further strengthen the security and resilience of data centres.

“Risk-wise, government regulations around data privacy, national data sovereignty and sustainability are building out across most markets,” said Mr Glen Duncan, Asia-Pacific director of data centre research at Jones Lang LaSalle. “If investors and operators don’t keep abreast of the changes, they can become wrong-footed.” BLOOMBERG

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