An ever-increasing thirst for capital
Data centres represent an increasingly attractive asset class for equity and debt investors looking to deploy capital. 2024 saw a continued increase in M&A and financing activity in the data centre sector as the ever-evolving need for cloud computing, AI, hyperscale activity, 5G, data storage and processing power combined to further drive investment. The Asia Pacific data centre market is poised to overtake North America as the world's largest by the end of 2025.1
Data centres are a capital-intensive asset and there is no 'one-size-fits-all' approach to financing as a diverse blend of sponsors, developers, private capital, PE funds, infrastructure funds and traditional and non-traditional lenders are participating in the rapid expansion of the sector.
There are a number of competing approaches, playing out in headlines such as:
- Blackstone and Canada Pension Plan Investment Board's acquisition of AirTrunk for an eye watering A$24 billion valuation (with no plans of slowing on founder Robin Khuda's vision of turning it into a $100 billion business);
- AustralianSuper's acquisition of a significant minority stake in Vantage Data Centers EMEA, investing €1.5 billion; and
- as recently as February 2025, CDC increases its valuation to $17 billion via a minority share sale to Future Fund and Infratil for $2.05 billion, beating out a number of interested bidders.
An increasingly varied capital mix
Financing of data centre assets takes on different shapes and sizes and the appropriate financing solution is driven by a number of factors, including the identity and strength of the sponsor and owner, the revenue profile, the development model used for the data centre, the development stage of the asset, the size, scale and number of assets, as well as the projected capex requirements of the developer.
A particularly important consideration is the revenue model. While traditional data centres often offered long-term leases with established cloud service providers (often in excess of 10-15 years) to deliver a stable and predictable revenue stream reflective of regulated infrastructure assets, we are witnessing an evolution in the way customers are contracting with data centre capacity. The result is fewer long-term lease arrangements (potentially accentuated by an increasing shift to AI data centres), combined with a move to shorter-term contracts with different counterparties of varying credit quality.
As a result of the different approaches to the revenue model, combined with the other drivers mentioned above, developers have sought to finance new and existing projects (including recycling capital) through a number of different methods and, in some cases, blending different financing frameworks within the same transaction, including:
- project based financing
- corporate or leveraged-style financing solutions
- portfolio-based financing
- asset-backed securitisation.
Single asset or project-based financing
Traditional project finance lenders can provide finance to data centres as long as certain parameters are met—particularly traditional infrastructure hallmarks such as clarity around land tenure and long-term lease/offtake arrangements backed by creditworthy counterparties.
This type of financing traditionally requires developers to grant lenders with higher levels of control associated with core-plus infrastructure financing, including providing detailed diligence around contracts, controlled project accounts and a regime of step-in rights to cure any material contractual breaches by the owner.
We have seen this approach being adopted for standalone greenfield projects and for operational projects with substantial expansion capex requirements. For certain transactions, we have seen a blended approach, reflecting aspects of a core-plus infrastructure project financing framework, but with increased flexibility of terms built into the debt package that reflect a mix of corporate, leveraged and LVR-style financing terms.
Corporate or leveraged-style financing
Increasingly, developers are looking to fund data centres through general corporate facilities, based on access to lines of credit from their overall group debt facilities, or through leverage-style financing (where lenders are assessing the transaction based on expected revenues tested on an EBITDA or loan to value-style basis). As discussed earlier, corporate finance and leveraged-finance style approaches are also being 'blended' into project-based finance transactions for certain data centre projects.
The corporate or leveraged finance model, and the 'blended' approach with the project-based finance model, have tended to be compatible with transactions where lenders are able to focus on multiple revenue contracts with short-to-medium tenors and a range of offtakers, rather than on the revenue base being underpinned by a single or a limited number of lease/offtake arrangements (with the latter often requiring more traditional project-finance style controls and credit hurdles to clear around tenor length and counterparty credit).
Under this framework, diligence requirements and controls and triggers in the debt terms around material contracts are becoming significantly streamlined, and we can expect this framework to continue to be adopted as strong developers build out their pool of assets. We are also seeing a diverging pool of debt supporting these platforms, with examples of developers tapping the Asian Term Loan market, in addition to domestic and offshore commercial bank debt markets.
Portfolio financing
Consistent with other asset classes (such as renewable energy, infrastructure and certain real estate asset classes), we are seeing a rise in portfolio-based financing of data centres, as sponsors seek to strengthen and increase flexibility in their financing terms by cross-collateralising a number of data centre assets, albeit still on a non-recourse basis beyond the pool of data centres. A lender's assessment of the portfolio will take into account a number of factors, including the proportion of operational versus greenfield assets in the portfolio, the revenue profile (including offtaker credit, tenor and offtaker concentration risk), the locations of the assets and for development projects, the type of contracting and development model utilised. We expect that portfolio refinancings will continue to be utilised as a funding tool as the number of data centre projects coming to market, and the funding required to develop those projects, increases.
Asset-backed securitisation
The more mature North American market has developed a significant asset-backed securitisation market for data centres. While this trend has not yet reached Australian shores in a meaningful way for data centre financing, we expect this market has potential to evolve as the asset class matures in both Australia and the broader Asia Pacific region.
Powering data centres goes green
Another trend set to continue into 2025 and beyond is the need for data centre operators to ensure that the impact of these assets (eg the huge power and water usage) is sustainable and in line with the ESG goals of both internal and external stakeholders, such as financiers, offtakers and customers.
This may take the form of hyperscale data centre offtakers requiring that the data centres they are contracting with source their energy from renewable power (often via PPAs with solar or wind projects), or even sourcing the PPAs themselves to cover power generation requirements.
For lenders, we expect that sponsors and developers being in a position to demonstrate that they have clear and specific commitments, strategies and measures in place around sustainability (including proximity and access to renewable power, supported by clean energy storage solutions, as discussed further in section one, will be an increasingly important factor in assessing the bankability of new data centre developments. This will be important as a general bankability consideration for any asset, but also to facilitate sustainability-linked loan solutions.