GIC to Fuel Equinix’s Hyperscale Market Ambition

Equinix, the world’s largest data center provider, is putting more firepower behind the push it started two years ago to build data centers for the world’s largest digital platforms.

The Redwood City, California-based company is forming a $1 billion joint venture with GIC, the Singaporean state-owned investment fund, to cater to the large data center requirements of about a dozen tech giants, including Alibaba, Alphabet, Amazon, Facebook, Microsoft, and Tencent. Starting with six facilities in Europe, the idea is to lease large footprints in those facilities to the platforms, connected to the big network-interconnection points in regular Equinix data centers nearby.

Traditionally focused on smaller-footprint, higher-margin retail colocation leases, Equinix recently has been branching out to take advantage of the skyrocketing growth of the hyperscale platforms. Companies specializing in wholesale data center deals, which can range anywhere from 1MW to 30MW per site, have been riding an unprecedented wave of demand for space and power in recent years as their hyperscale clients scale their platforms.

Equinix’s core business model has largely precluded it from getting on that ride. Meanwhile, smaller companies that have traditionally leased retail colocation space from the likes of Equinix have been deploying more and more of their software in public clouds like Amazon Web Services and Microsoft Azure instead of on their own servers housed in colocation facilities or in their own data centers.

As a result, overall growth in the retail colocation market has slowed. Structure Research, which closely tracks the global data center services market, projects global retail colocation revenue to grow at slightly over 6 percent per year on average over the next five years, from $26.9 billion in 2018 to $39.2 billion in 2014. That’s compared to low-to-mid-teen-percent annual growth just four years ago, Jabez Tan, head of research for data centers at Structure, told Data Center Knowledge in an interview.

The global wholesale colocation market, however, is projected to grow at close to 16 percent a year during the same period, according to Structure, going from $12.6 billion in 2018 to $30.6 billion in 2024.

Equinix’s announcement is symptomatic of “a natural evolution of a slowing retail business,” Tan said.

The company said proximity to their network points of presence in its interconnection-heavy facilities makes its hyperscale sites attractive to the cloud platforms. In turn, tethered to core hyperscale infrastructure nearby, the interconnection facilities become more attractive for enterprise customers wanting to use cloud services by connecting directly to their networks.

HIT Becomes xScale

The brand for data centers operated under the joint venture, 80 percent-owned by GIC and 20 percent-owned by Equinix, will be xScale. It’s a new name for the initiative and the team behind it that used to be called the Hyperscale Infrastructure Team, or HIT, headed by Jim Smith, former CTO of Digital Realty Trust, the world’s largest wholesale data center provider. (Digital has been selling the concept of large hyperscale facilities leased on a wholesale basis while tethered to interconnection-dense retail colocation nearby since 2015.)

Smith led the effort to create the xScale joint venture, Eric Schwartz, Equinix’s recently appointed chief strategy and development officer, who previously ran its EMEA business, told Data Center Knowledge. “Jim and I worked closely together to get to the announcement today,” he said.

As part of the agreement, expected to close sometime in the third quarter, Equinix will sell two existing data centers developed under the HIT initiative, one in London and one in Paris, to the JV; the company will also sell “certain development investments” to the entity – all in return for cash and its 20 percent stake. Equinix has four development sites under contract in Europe (two in Frankfurt and one each in Amsterdam and London) on which it will build four xScale data centers.

To pay Equinix for its contribution and to fund construction, the JV has secured €850 million, or about $960 million, in credit facilities.

A “significant portion” of the two existing data centers Equinix is offloading to the JV (LD10 and PA8) is already under lease, the company said.

Together, the six European xScale sites will provide about 155MW of data center capacity, the company said. That capacity will be spread across Europe’s four primary data center markets, collectively referred to as “FLAP,” which stands for Frankfurt, London, Amsterdam, and Paris.

Not a Full-Fledged Wholesale Business

Equinix’s announcement states that the JV’s formation doesn’t signal a “broader entry into the wholesale market.” It’s an important point for the publicly traded REIT to make, but it’s also now harder to make it.

Part of the reason it chose the JV vehicle to go after hyperscale business was to avoid spooking investors into thinking the company was upending its traditional business model. The bigger reason, according to Schwartz, was the amount of capital needed to build facilities at the scale and the speed hyperscale customers require.

Equinix already deploys about $2 billion in capital annually to expand capacity and stay ahead of the demand for its retail colocation and interconnection services. While the company has been able to fund its first hyperscale facilities on its own, meeting its growth ambitions in that space would require changing its financial model, Schwartz explained. The JV gives it immediate access to sums like the initial $1 billion GIC is investing without having to explain to investors why it’s borrowing that kind of money to grow a business whose returns are much lower than from its core retail colocation business.

The company has been selectively competing for wholesale deals outside of the US for some time now. The joint venture injects a lot of additional capital into those efforts.

Speaking with Data Center Knowledge about the company’s hyperscale efforts last year, Charles Meyers, who was then Equinix’s president of strategy, services, and innovation but was later named its CEO, told us joint ventures were its preferred way to fund these efforts. Besides making it easier to sell the story to investors, it helps soften the negative short-term impact on investor returns from the natural dynamics of the wholesale business, where lower return margins, large upfront-investment requirements, and “lumpy” demand are offset by steady returns over long periods of time.

So, is Equinix entering the wholesale data center market? It’s entered that market years ago, but it’s only gone after a subset of the market, and it’s done so selectively and opportunistically. Is it taking away from its core retail business? The company’s management has come up with a creative strategy for avoiding that; whether that strategy will be effective remains to be seen.

To further demonstrate that it’s not building a typical wholesale business, Equinix is limiting xScale’s target market to the dozen tech-giant customers, a group that not only includes a handful of the largest platforms but also the likes of IBM, SAP, and Oracle, which aren’t as large but operate on the global scale and support enterprise customers with cloud services.

“The growth of the hyperscale category is clearly strong,” Schwartz told us. “This is an opportunity for us to capture a portion of it, but it’s not by any means something we’re doing instead of driving” growth in the core retail colocation and interconnection business.

“Equinix’s strategy is still very focused on that retail-interconnection direction that we’ve been on since the beginning. The hyperscalers are ... an adjacent opportunity that we have historically not addressed.”

Equinix’s xScale strategy isn’t limited to the joint venture with GIC or to the European market.

Schwartz said the xScale team is looking for opportunities outside of Europe. Some of the prime candidates for expansion include sites adjacent to the Infomart Dallas carrier hotel Equinix acquired in 2018 and the dedicated hyperscale data center site the company is building near its TY2 data center, one of the main carrier hotels in Tokyo.

Its future moves to benefit from the cloud growth may include hyperscale builds funded on its own, by the GIC joint venture, or by another joint venture with another partner, he said.

New Big-Money Player in the Data Center Market

Deep-pocketed and well-known in world of finance, GIC is a newcomer to data center investing. This is its third deal with a data center developer. The first one was an investment early last year in EdgeCore Internet Real Estate, a newly formed wholesale data center business that’s been building in North America. GIC announced its second investment in computing real estate only a few weeks ago, partnering with another newly formed data center developer, Singapore-based Polymer Connected, which is planning to build hyperscale facilities in Jakarta.

In recent years, institutional investors such as sovereign wealth funds (like GIC), pension funds, and infrastructure funds have been lining up to put money into data center development. Considered until recently an esoteric asset class, data centers that can be leased on a long-term basis to clients like Amazon, Google, or Facebook are now recognized as stable investments similar in profile to traditional infrastructure like roads and airports.

Such investors are widely expected to continue funding consolidation of existing assets and creation of new players in the global data center sector for the foreseeable future.