When you think of Generative AI, you immediately think of your ChatGPT experience. It would be highly unlikely that you think about a large concrete building situated often in the middle of nowhere, literally, powering the rise of Artificial Intelligence.
Zoom into the vision of a data center here — picture a massive physical facility housing thousands of computer servers, nested in climate-controlled environments, running constantly, consuming truckloads of energy as we do searches using ChatGPT — the view is quite non-sexy, non-tech, brick and mortar, but it is the backbone of the AI revolution.
Data Centers are not a new phenomenon; the bitcoin boom pushed their usage through the roof. Bitcoin is the world’s first decentralized cryptocurrency, where currency transactions are recorded on blockchain. Bitcoin is produced or mined by data centers, and there has been an increasing mining activity in the US since China cracked down on it since 2021, further accelerating the boom in the US that started in 2019. AI’s growth has dramatically elevated data center usage further.
A data center has 4 key components: the facility of the center, the industrial equipment running it, IT hardware and software. They do not come cheap to build: A 700,000 square foot, 60-megawatt data center would cost between half — three quarter of a billion dollars to build. Usually they are owned by large cloud computing companies, banks or telcos for their own purposes or co-location companies. Co-location companies rent space for computer servers and other hardware for those businesses who can afford an exclusive data center set up (NTT, CoreSite are examples).
Market size for Data Centers
The US accounts for 40% of the global data center market with concentration in Northern Virginia, Dallas Fort Worth, Chicago and Silicon Valley, but Latin America, Europe and Asia-Pacific are keeping pace.
The top 10 Data Centers includes those owned and operated by the usual technological behemoth suspects like Amazon, Microsoft, Google, Meta who are the global, but the largest 250 list has some regional specific players as well. The big players are teaming up with AI companies to break dependencies and in turn, potentially create massive monopolistic structures in the future: Microsoft and Open AI are talking about $100 billion investment in a data center to break the dependence on Nvidia.
For computing, the Data Center business is a fast-growing, “painkiller, not vitamin” business attracting the attention of all kinds of investors — growth capital, buyout and real estate investors. Mergers & Acquisitions were close to $50 billion in 2022, up from $8 billion in 2015 -a six-fold jump in 6 years! Most investments are being done by private equity participants, sometimes co-investing with government organizations. The size of these investments have so far de-democratized it for your regular investor.
When the AI craze picked up, several AI companies were competing with the traditional enterprise customers, the hyper scalers and cloud users for capacity — overall this has pushed up prices for data center usage. Singapore has the highest rental rates at $300 to $450 per month for a 250- to 500-kilowatt (kW) requirement, while Chicago has the lowest at $115 to $125.
The dark side of Data Centers
A cloud looming dark on the horizon specific to AI and Data Center is the sustainability cloud.
AI is unsustainably environment unfriendly as of today, as the following statistics point out: ChatGPT consumes 25 times more energy than a google search and fine-tuning GPT3, GPT4’s predecessor tool consumed 1,287 Megawatt hours of electricity or the equivalent of energy need to light up 21 homes in the US for a year. Information about energy usage of AI by the tech giants has been kept under wraps till ChatGPT opened up the pandora’s box on sustainability.
Communities are not too happy on the implications of Data Centers and there is a moratorium against them in Dublin, which is one of Europe’s most active data center markets. It would not be long before other locations impacted would come out protesting their environmental impacts.
That also means that regulation is not far ahead: Singapore has introduced a sustainability standard for data centers in tropical climate. In the US, Senator Massachusetts Senator Ed Markey has introduced a bill to study the environmental impacts of AI in 2024.
Spring boarding AI through accelerating Data Centers
Data Centers are growing exponentially, offering opportunities for innovation that helps them to be more efficient and sustainable.
Price sensitivity and supply shortage can spur creativity especially around how much can be packed into the same space and improvements in liquid cooling -which is vital for AI powered chips.
Below are a selection of companies driving further sparks into Data Centers.
Data Center Incubator program. Israel has launched a first-of-its kind incubator program called the Tirat Carmel incubator in the summer of this year as a joint partnership between MedOne Data Centers, the IT HUB innovation center of Tirat Carmel municipality, and Sarona Partners investment fund. Focused on startups with MVPs, the goal is to leverage the network of mentors and partners to get a leg up into deals with design partners, and fund raising. This is an equity free engagement for startups.
Some interesting startups are
Infinidium based out of Calgary, Canada claims to have created one of the most efficient cooling systems. Their Vortex Vacuum Chamber sucks cool air into a bell-shaped chamber where server boards are arranged in circular racks. The chamber generates power by allowing the air to rise to a vent where it drives a turbine on its way out. They have launched their ICO in May 2024, to be conducted in 4 rounds of equal allocation.
ZutaCore based out of San Jose, California offers its HyperCool technology which is direct-on-chip, waterless liquid cooling system that repurposes 100% of the heat produced. The offering is hardware only, with an aggressively limited use of space, implying lowered use of energy, resources, land and construction. It is wholly owned by the Wistron Group based in Taipei.
Here is a selection of top investors
Florida based Digital Bridge Group, a PE firm founded in 2013 partnered with Silver Lake to put in $9.2 billion equity investment in Vantage Data Centers, a data-center developer that Digital Bridge acquired in 2017 alongside the Public Sector Pension Investment Board and TIAA Investments.
Blackstone, with $1 trillion assets under management, manages a $55 billion data center portfolio and has a $70-billion-plus pipeline of future data center development projects A notable acquisition has been Airtrunk ,Asia- Pacific’s largest data center operator in Malaysia bought along with Canada Pension Plan Investment Board.
More comprehensive list is here: https://pitchbook.com/news/articles/meet-the-10-most-active-data-center-investors
For you, my reader, as an independent investor the ticket-sizes maybe too large to invest in these ventures. However, there are some government organizations that are very active in co-investing in these ventures. It would make sense to track further investments that public organizations are undertaking in this space, to understand where and why tax payer money is being used. Innovation after all is by the people, for the people.
