News & media Finding the Efficient Frontier in Data Centre Investing
By Joel Ntamirira, Cordiant Digital Infrastructure
Whilst AI and hyperscale demand continue to dominate the mindshare across the data centre industry, at Cordiant, we see the strongest investment opportunities in wholesale and retail colocation. This sub-segment of the data centre space is particularly well-suited to mid-market investors, where disciplined capital deployment can balance risk and unlock superior returns.
A sector of growing importance
Data centres have become mission-critical infrastructure for the global economy, underpinning everything from cloud services to artificial intelligence. The global data centre market is on a high growth trajectory, with global power demand from data centres projected to increase 50% by 2027 and by as much as 165% by the end of the decade (compared to figures from 2023)[1]. Unsurprisingly, the sector has become one of the most increasingly attractive alternative asset classes, with several $10 billion-plus PE-backed deals closed in recent years, including CyrusOne, QTS, and AirTrunk.
But while the demand story is straightforward, the investment case is more nuanced. Acquiring fully developed, core assets with long-term tenants is prohibitively expensive: valuations have ranged between 25x and 30x EBITDA. For many investors, the real value lies not in chasing trophy assets but in deploying capital with precision across the spectrum of risk and return.
The investment conundrum
(a) Predictability with limits: contracted builds
At one end of this spectrum sit contracted builds: projects launched with anchor tenants secured from day one. Typically, these are bespoke facilities for hyperscalers such as Amazon Web Services, Microsoft Azure, or Google Cloud. For investors, the appeal is clear: the risk profile is low, revenue streams are underpinned by long-term contracts, and cash flows are stable.
But those advantages typically come with lower returns as capital as competition is fierce. While hyperscale data centre investments benefit from strong demand, long leases, and infrastructure moats, they face competitive pressures and rising input costs. Developers underwrite hyperscale deals expecting IRRs typically in the high single-digits, especially for lower-risk opportunities.
This sub-segment is perfectly suitable for larger investors. Lower-risk, lower-return deployments at a significant scale, and underpinned by secular trends in public cloud and AI.
(b) When bets go big: Speculative builds
At the other extreme are speculative new builds. These are large, high capital expenditure projects launched without anchor tenants secured. Developers bet on rising demand, aiming to lease space to multiple enterprise or cloud customers after construction. If the market absorbs capacity as anticipated, the payoff can be significant.
However, the risks are equally significant. Tenant delays, regulatory changes, or shifts in power availability can quickly erode the economics of a speculative build. For institutional investors, the volatility makes this strategy a difficult fit.
In the world of wholesale / retail colocation, it’s unlikely that all future capacity will be fully contracted, hence investors must live with some ‘speculative risk’. Simply put: Don’t want to invest? You’ll eventually run out of capacity to sell. Over-invest ahead of customer demand? You’ll kill your returns.
The discipline with which investors and operators effectively manage this risk plays a key role in overall investment performance.
Smarter growth: Modular build-outs
Between these poles lies a middle ground that we at Cordiant see as particularly compelling: modular build-out strategies in the mid-market. Instead of committing significant capital in upfront CapEx, modular strategies align investment with contracted demand. Capacity is built in phases, triggered by underlying customer demand.
This model has been successfully deployed by Cordiant-owned operators such as Datacenter United across Belgium, where incremental 1 – 2 MW expansions allowed facilities to grow alongside demand from local enterprise customers. The benefits are clear: modular buildouts reduce exposure to demand misjudgements, avoid idle capacity, and preserve the option to adapt design and technology as customer requirements evolve.
For investors, this means risk is actively managed but without the limited upside of fully contracted builds or significant naked deployments of large speculative builds, a suitable balance of risk and reward. The ‘efficient frontier’.
Cordiant’s Buy, Build, Grow approach
This is the heart of Cordiant’s Buy, Build, Grow approach. We identify high-quality mid-market platforms where growth potential is real but not yet fully realised. These are often regional operators with strong customer bases, scalable sites with significant in-building expansion potential, and access to power and connectivity, but lacking the capital to unlock the next phase of growth.
Our approach is threefold:
- Buy into scalable operating businesses at fair valuations;
- Build capacity in a modular, demand-led way, ensuring CapEx is phased and efficient;
- Grow alongside our customers.
This strategy allows us to capture attractive returns while actively managing commercial and execution risk. It also positions us in markets often overlooked by larger investors due to their scale requirements, where competition is less intense, but demand growth remains strong and should accelerate with edge and inference workloads where proximity to the end user will be valuable.
Investing with precision
The digital economy’s trajectory is clear: global internet traffic is set to increase and AI training and inference workloads, which require power densities many times higher than conventional enterprise servers, are driving relentless growth in data centre demand. Meeting this demand will require capital to be allocated with discipline and precision.
For investors, the key is not whether to invest or fear a ‘bubble’, but how to invest. By leaning into modular, mid-market opportunities, the right balance is achieved. Avoiding the pitfalls of overpaying for core assets or overcommitting to speculative developments, while capturing the returns that disciplined capital deployment makes possible.
At Cordiant, that balance is where we focus, and where we believe long-term investor value truly lies.
[1] https://www.goldmansachs.com/insights/articles/ai-to-drive-165-increase-in-data-center-power-demand-by-2030