Family offices pivot to invest in greener data: ‘the new oil’

Family offices are significantly increasing their allocation to digital infrastructure, such as data centers and fiber networks, driven by the exponential growth in demand from AI and digitalization, and the asset class's resilience to inflation and ability to provide stable, long-term returns. While currently a small portion of alternative allocations, nearly a quarter of family offices plan to boost exposure over the next five years, viewing it as a 'future-proof' investment that also aligns with generational values around sustainability and social impact, particularly concerning energy consumption. However, investors face risks including high valuations (some data centers at 25x EBITDA), potential oversupply, the critical need for expert manager selection, and evolving power demands, making careful due diligence essential.

Analysis

Family offices are strategically pivoting capital from traditional assets like real estate towards digital infrastructure, driven by powerful secular tailwinds from artificial intelligence and broad digitalization. The global data center market is projected to more than double in size to $584 billion by 2032, attracting investors with its resilient, inflation-hedged characteristics, such as monopolistic positioning and long-term contracts with hyperscalers like Amazon and Microsoft that can target internal rates of return of 15 percent. This shift is not just about data centers, but the entire enabling ecosystem, including the critical power infrastructure required to support it. Data center electricity consumption is forecast to increase up to fourfold by 2035, creating a dual opportunity in both digital assets and the energy sources that power them, with a notable emphasis on renewables and energy efficiency to enhance asset value and appeal to a broader range of future buyers. Despite the strong fundamentals, including US data center vacancy rates below 2%, significant risks persist, most notably high valuations with some assets trading at 25 times EBITDA, the threat of regional oversupply, and technological risks from more efficient AI models. Consequently, experts emphasize that manager selection is paramount, favoring experienced operators with deep track records in site selection and securing power.

Key Decisions for Investors

• Investors should consider gaining exposure to the digital infrastructure theme, but exercise caution due to high valuations and focus on managers with proven expertise in navigating site selection, power procurement, and tenant contracts.
• Evaluate opportunities across the entire value chain, not just data centers, but also the essential enabling infrastructure including power generation, grid modernization, and energy efficiency technologies.
• Given the high operational complexity and capital intensity, access via specialized private funds or co-investments with experienced managers who have at least a decade of sector experience is preferable to direct investment.
• Monitor key risk factors such as data center vacancy rates, regional supply-demand dynamics, and technological advancements in AI efficiency that could alter long-term power consumption forecasts and asset viability.