The nearly US$600 billion asset manager sees smaller data centre portfolios as complementary to large campus assets as demand for digital infrastructure accelerates.
Speaking to Investor Daily during a recent Australian visit, Principal managing director and portfolio manager Casey Miller said the firm is increasingly seeing the benefits of a portfolio of smaller data centre sites alongside large data centre campus exposure.
Having worked across all levels of scale in the data centre investment market since joining Principal in 2006, Miller said the smaller portfolio space is an area the firm is looking into at present.
“We think this appeals to a broader subset of eventual investors who want to own these long term as we go to exit them. If you’re dealing with a multi-billion dollar portfolio, there’s only so many buyers that can access that.”
Miller’s visit comes amid rapidly growing data creation and consumption, with the volume of digital data generated, used and stored expected to rise 118 per cent between 2005 and 2028.
At the same time, digital data generation is expected to largely outpace storage capacity, creating a classic supply-demand imbalance.
While data centres are often tied to AI bubble concerns, Miller argued that demand from other sources such as streaming, gaming and social media alone supports a strong investment case. Moreover, the hundreds of billions of dollars committed by hyperscalers signals confidence in the trend’s longevity.
“Even if AI went away tomorrow, we would still have a tremendous need for more data centres just to support the apps that we already use on a daily basis,” he told Investor Daily.
Institutional investor interest
Principal’s investor base includes multi-managers, large super funds and sovereign wealth funds. According to the firm, its focus in Australia is on helping local investors access US and European real estate, sectors to which investors are often underweight and are not readily available domestically.
In his discussions with clients, Miller said local investors are already well versed in data centre investing, with conversations now centred more on the diversification benefits of smaller-scale developments.
“It’s about trying to provide asset, location and tenant diversification, and to give investors a more diversified portfolio that’s ultimately easier to manage.”
He added that Australian institutional investors stand out for their “extreme selectivity” when choosing investment partners, given the scale of capital they need to deploy and the long-term nature of real asset investment.
Power as the ultimate bottleneck
Miller’s visit also comes as industry super fund Rest cited Blackstone’s recent minority stake in Rowan Digital Infrastructure as an example of long-term value creation through decarbonisation and digitalisation themes. Rowan is a US hyperscale data centre developer in which Rest is invested via Quinbrook’s Net Zero Power Fund.
As Miller explained, the thesis for data centre investment is further strengthened by its high barrier to entry, as electricity constraints are limiting the development of new facilities.
The twin pressures of rising data centre demand and constrained power supply are being felt across the world, with governments increasingly intervening on measures such as offsets and renewable energy solutions.
Earlier this month, all Australian state and federal energy ministers excluding Queensland agreed that onshore data centres should “fully offset” their electricity demand through investment in new renewable generation and energy storage.
As data centre development faces growing community concern over power and water use, the government had previously issued “expectations” in March regarding renewable energy and sustainable water use. The Australian government is also requiring data centre operators to provide their own power.
Miller said in his discussions with clients, many are now asking how quickly facilities can be built given power constraints, a dynamic also evident in the US.
“There needs to be some sort of balance between that and government regulations – the notion that they should provide their own power.
“I understand what governments are trying to do, but they would need to open up or further widen the regulations around things like nuclear, which sometimes isn’t viewed as a favourable alternative source, as well as renewables.”
He noted that in the US, most hyperscalers have acquired formerly shuttered nuclear plants and are working to bring them back online, though he said this requires significant effort, while building new facilities is even more time-consuming.
In addition to nuclear, he added that natural gas is prevalent, with some data centre developers looking into where they can use gas fired turbines to create electricity. However, he admitted that this can be very expensive.
On renewables, he said that while hyperscalers have made “tremendous investment” in the sector, scale remains the key challenge.
“The amount of nuclear or wind and solar that it would take to run a large-scale data center is a lot, and I’m not saying that it’s a bad idea, but you just need to understand what exactly they are asking for.”
Ultimately, with infrastructure grids not built for this level of demand growth, he argued greater public–private partnership will likely be needed to make development viable.
“[For Australia], the advice is to get ahead of that to the extent that you can.”
