The data center investment opportunity
The global data center market is experiencing unprecedented growth, driven by the exponential increase in data consumption, cloud computing and artificial intelligence (AI) applications. According to Precedence Research, the global data center market size was estimated at $347.64 billion in 2024 and is predicted to increase from $386.71 billion in 2025 to approximately $1.01 trillion by 2034, expanding at a compounded annual growth rate (CAGR) of 11.24% from 2025 to 2034 (Data Center Market Size, Share and Trends 2025 to 2034).
This surge presents significant opportunities for investors seeking stable, long-term returns in digital infrastructure.
Investment, development and infrastructure
Financing approaches: Navigating capital structures
Investors have multiple avenues to finance data center projects, including:
- Public market vehicles: Real estate investment trusts offer liquidity and access to public markets but may have limitations on development projects.
- Asset-backed securities (ABS): ABS structures can provide tailored financing solutions but may involve complex structuring and pose regulatory barriers that are ultimately subject to prevailing market conditions.
- Private funds: Private equity funds remain prevalent, offering flexibility in investment strategies and structures.
Notably, global data center assets valued at a combined total of $170 billion will need to secure construction lending or permanent financing in 2025, according to “Why data center finance is diversifying,” a February 12, 2025 article in JLL.
Structuring considerations: Aligning strategy with structure
When structuring a data center fund, the following must be considered:
- Investment strategy:
- Greenfield projects involve building new data centers from the ground up, offering customization but with higher development risks.
- Brownfield projects focus on acquiring and upgrading existing facilities, allowing for quicker deployment and potentially lower costs.
- Buy-to-hold strategies involve long-term ownership, focusing on stable income generation.
- Investment geographies: Jurisdictional considerations, including regulatory environments and market demand, play a crucial role.
- Fund size: This factor determines the feasibility of certain projects and influences the investor profiles targeted.
- Tax efficiency: Failure to properly navigate local and international tax laws can result in tax overpayments and/or legal risks.
- Target investor base: Institutional investors have different concerns from high-net-worth investors, which may dictate fund structure, disclosure requirements and compliance obligations.
- Investor jurisdiction: The domicile of investors can influence regulatory requirements, tax implications and reporting obligations.
- Fund manager location: The location of the fund management team is critical, as fund management is typically a regulated activity and likely will attract licensing obligations in each of the respective jurisdictions.
Key fund features: Designing the investment vehicle
When defining the terms of data center funds, key aspects include:
- Fund structure:
- Open-ended funds: This refers to funds that allow for subscriptions and redemptions throughout the unlimited life of such a fund. It allows for ongoing capital raising but may face liquidity management challenges given the inherent illiquidity of such assets. These are more suitable for buy-to-hold strategies.
- Closed-ended funds: This refers to funds that have a fixed fundraising period and term, providing a clear investment horizon but limited flexibility. These are more suitable for greenfield and brownfield strategies.
- Term and life cycle: It is critically important to align the fund’s duration with the investment strategy and expected asset life cycle.
- Commercial terms: It is crucial to design the key commercial terms carefully (such as management fee, hurdle rates, carried interest and performance fees) to maximize the marketability of the fund during the fundraising period.
- Leverage considerations: Debt financing at the asset level is often used in greenfield or brownfield projects to optimize the adopted capital structure.
- ESG considerations: It is still important for certain institutional investors to incorporate and address environmental, social and governance factors in the deployment of capital for acquisition (particularly energy efficiency in funds for data centers, which are notoriously high energy-consuming) as well as in the operation and arrangement of all fund assets.
Conclusion: Strategic alignment and forward planning
Strong understanding of the fund formation process from inception through all its stages is necessary for implementing the investment strategy, securing tax efficiency and ensuring regulatory compliance. A well-structured fund can effectively capitalize on the growing demand for data center investments and maximize returns for both investors and fund managers.
For more information on the structuring and establishment of data center funds, please get in touch with your usual Reed Smith contact.