Data Centers Attracting VC, Private Equity, and Bank Debt

By David Gross

On the heels of the IBM-Blade and PLX Technology-Teranetics deals in the data center networking industry, Thompson Reuters and the National Venture Capital Association recently reported that there were 322 venture-backed M&A transactions through the 3rd quarter of this year, up over 60% from 2009.     Additionally, there have been 40 IPOs for venture-funded companies in 2010, up 5-fold from a year ago.

If the current rate of M&A deals continues through this quarter, there will be more deals in 2010 than there were in 2007, a point the Thompson Reuters/NVCA press release highlighted as a "record pace".

While this is all good news, the annuity nature of data center services has made this industry very attractive to private equity, and this sector gets far more expansion capital from that source, as well as traditional bank debt, than other technology industries.  Moreover, data centers have been somewhat isolated from the credit crunch elsewhere in the economy the last couple of years.     i/o Data Centers, for example, raised $56 million from private equity firm Sterling Partners in the historically miserable 4th quarter of 2008.   More recently, Latisys raised $110 in bank debt to expand its footprint in Northern Virginia, Denver, and Southern California.

Providing annuity revenue streams to private equity firms and banks, data center providers are not under significant pressure to go public like venture-funded technology firms.   The "liquidity event" comes when customers pay their rent, not when the company is sold.   However, with Equinix (EQIX) and Rackspace (RAX) still delivering 20 percent top line growth as established public companies, data centers can still fit the criteria for venture portfolios as well.