Two days before Christmas, Robin Khuda became a billionaire. The milestone marked the culmination of a vision that had started ten years earlier when, as a former finance director of an Australian data center operator, he decided to launch a venture of his own. Like many international entrepreneurs, Khuda took inspiration from America. “Cloud computing in the Asia-Pacific is probably about three to four years behind the US, but there is a massive catch-up,” he told an interviewer.

In 2015, Khuda founded AirTrunk with the goal of building giant data centers capable of satisfying the burgeoning demand from cloud service providers such as Amazon and Microsoft. He succeeded in raising A$400 million, one of the largest cheques written for a pre-revenue start-up in the region, and, in record time, built Australia’s first hyperscale data center – a 64,000 square meter site in Western Sydney with 80 megawatts of capacity. He soon opened a similar facility in Melbourne and went on to build nine more across markets including Malaysia, Japan, Hong Kong and Singapore while expanding the capacity of existing sites. In 2020, Macquarie acquired 88% of the company at a valuation of US$2 billion and last year Blackstone took control for US$16 billion.

As well as catapulting Khuda up the Australian rich list, the deal established Blackstone as the largest data center business in the world. Blackstone first entered the market in 2021 with the acquisition of QTS, a US and European data center provider, in a $10 billion deal. “Just as we recognized the rise of e-commerce nearly 15 years ago and started buying warehouses, we anticipated a paradigm shift around demand for data centers driven by growth in content creation, cloud adoption, and most importantly now, the revolution underway in artificial intelligence,” Blackstone CEO Stephen Schwarzman told investors last year.

Blackstone currently values its portfolio of leased data centers at $80 billion. So far, returns have been strong. Across the firm’s entire asset base, data centers were the largest single driver of capital appreciation in the 12 months to September 2024. On QTS alone, it has made over 2.5 times its money.

No surprise, then, that the firm isn’t the only one investing. In 2022, KKR and Global Infrastructure Partners (now owned by BlackRock) acquired CyrusOne, a company operating 50 data centers worldwide. KKR has invested around $30 billion across 22 investments in data centers and fiber optics to date and has partial ownership in a portfolio which on a fully consolidated basis is worth around $150 billion. Other asset managers active in the sector include Brookfield, BlueOwl and DigitalBridge – a specialist focused exclusively on digital infrastructure.

In many cases, asset managers have taken existing operators private but a few compete independently. Digital Realty Trust and Equinix both trade in the US, and NextDC – the company Robin Khuda was finance director for – is valued at US$6 billion on the Australian Stock Exchange.

Tech companies themselves are also competing for size:

All-told, Blackstone estimates that data center development globally will require $2 trillion of capital expenditure over the next five years. Marc Ganzi, Chief Executive Officer of DigitalBridge, frames the forecast. On a podcast in September, he calculated that $2 trillion has already been spent on public cloud over a 12 year period to bring capacity to 18 gigawatts (by way of comparison, AirTrunk has 1.4 gigawatts of capacity). He estimates a further $1 trillion will be required to take capacity up to 30 gigawatts. In addition, he reckons 55-60 gigawatts of new compute is required to deliver generative AI which, at $10 billion of capital expenditure per gigawatt, implies a spend of $600 billion. Alongside power needs, he estimates incremental total costs of $900 billion, excluding fiber connectivity, servers, people and other aspects. “That’s a pretty safe number today,” he says.

And then DeepSeek happened.

Source: Deutsche Bank

Reports last week that Chinese developer DeepSeek has obtained similar AI model performance at a fraction of the cost of existing models raises questions over whether AI infrastructure companies will continue to capture such a high share of the technology’s economics. DeepSeek demonstrated that using novel computational techniques for model inferencing (i.e. “thinking” about the answer to each question) together with more efficient training make it possible to produce AI models with fewer resources than previously believed. If AI infrastructure is less essential in realizing the economic potential of generative AI, then companies engaged in its buildout may suffer.

Certainly, market prices seem to reflect that. The stock price of Robin Khuda’s old company, NextDC, fell 7% over the week and is 19% off its highs. A local peer, DigiCo – which only came to the market in December – now trades 9% below its IPO price.

To read more about private equity’s role in the AI infrastructure buildout and whether firms have contributed to an unstable capital cycle, read on. You can also join me and of to discuss it, as well as other themes we’ve each written about, in a live video conversation in the Substack app starting soon, at 1:30 pm ET (6:30pm GMT). If you don’t already have the app, you can download it here and then join us here.


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