Transactional Risks

Data centers are an attractive investment target due to the expected rise in demand for computing power as AI applications proliferate. Investors are therefore acquiring data centers at various stages of development, from shovel ready to part-constructed or fully operational. There are numerous risks for investors to be aware of and seek to mitigate.

Market environment

We have seen a wide range for transaction sizes in this sector, from mid-market to multi-billion large-cap transactions. There is also not a typical buyer/seller. Instead, we have worked with investment funds, strategic purchasers and sovereign wealth funds, the breadth of investors clearly demonstrating the strength of the data center sector.

Whilst we have worked on numerous traditional mergers and acquisitions (M&A) structures, we have also seen a steady increase in investments through subscription models, particularly in large-cap transactions. This enables the underlying infrastructure platform to onboard additional investors onto operational assets, whilst also raising funding to boost growth.

Data center specific risks

  • Supply chain disruptions can affect cost and timelines — currently steel prices are up ~50% and there are extended delivery times for items such as chillers, generators and lighting.
  • Property rights and title to the assets, particularly in multi-jurisdictional transactions can pose a number of challenges. On occasion, the title has not been registered or there are gaps in planning and/or permissions (i.e. rights of way or easements).
  • Intellectual property (IP), information technology (IT), data protection and cyber are seen as higher risk areas and are becoming a focus in the diligence process.
  • Due diligence sampling methods on larger transactions are coming under greater scrutiny, to avoid gaps in coverage a detailed scope which examines deal-specific risks is required.

Due diligence sampling methods on larger transactions are coming under greater scrutiny, and need to ensure they are well planned to avoid gaps in coverage.

Recommendations:

  • Identify key value drivers of the transaction
  • Obtain detailed technical diligence of the underlying assets
  • Consider risks relating to operational and property elements such as:
  1. Title, planning and permits
  2. Environmental diligence (including an increasing focus on ESG compliance and benchmarking)
  3. IT, cyber and GDPR/data protection (particularly where large workforces or customer bases exist)

Opportunities:

  • Consider specialist tax liability insurance to protect against specific and known tax issues which could crystallize into a tax liability. This is a frequent issue for businesses operating cross-border and requires adequate protection.
  • Consider specialist insurance protection against loss from an identified risk, including:
  1. Prospective or ongoing court or arbitral proceedings​
  2. Contractual interpretation issues​
  3. Identified contingent balance sheet liabilities​
  4. Complex ownership/title risks​
  5. Regulatory decisions ​

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