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The future of the digital infrastructure asset class can be seen in the history of the real estate asset class, experts from PREA and Five Point Infrastructure tell Cool Vector.
A mountain of institutional capital is eyeing data centers, but investors - including US pension funds - can often spend years studying a new asset class before beginning to allocate to it. Real estate is a good example of this journey from a niche opportunity, deemed uninvestable by institutional capital, to an enormous, universally embraced, mature asset class.
Cool Vector spoke with two institutional investment experts to better understand the current view of data centers among institutional real estate investors, and what the future may hold for digital infrastructure in the institutional portfolio.
This fascinating conversation between Greg MacKinnon, Director of Research at Pension Real Estate Association (PREA) and Jeff Eaton, a Partner at Five Point Infrastructure, covers topics of interest to anyone seeking to better understand the increasing partnership between private capital and data centers. Among the key takeaways:
• Institutional investors are just beginning the learning curve on data centers—just like they once did with real estate. Despite massive interest, pensions and endowments are still figuring out which allocation "bucket" data centers belong in, and how to underwrite them—a process similar to how real estate entered institutional allocations in the 1970s. “Everyone's learning about it, but it takes a while for an institutional investor to get to a point where they can actually sort of put capital to work," says MacKinnon.
• Institutional investors—especially public pensions—move slowly and cautiously when adopting a new category, but once it's approved, that category can rapidly grow to become a core portfolio component. "They have to go through a rigorous allocation process, which can take six months, a year, a year and a half, especially if you're a sovereign wealth fund or a public pension fund," says Eaton.
• Greenfield data center projects offer high returns, but carry risk many investors are not yet equipped to manage. “That just causes an institutional investor to have to do even more work: Is it worth the extra three or 400 basis points for this extra risk that I'm taking?" asks Eaton.
• Data center demand is creating new adjacent investment themes—especially around energy infrastructure. “Even if you've allocated to data centers before, there's going to be other opportunities for you to get decent returns by having derivative exposure to the data center asset class," says Eaton.
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