Abu Dhabi Investment Authority (Adia) has just become the biggest allocator to a new platform for investing into China's fast growing data centre sector, and it plans to add more such assets both in Asia and globally, an executive familiar with the institution told AsianInvestor.

The sovereign wealth fund committed several hundred million dollars of the $1.3 billion that Hong Kong-based Gaw Capital has raised for the strategy, the source said on condition of anonymity.

Neither Adia nor Gaw would confirm the precise figure for what is the latter’s first data centre investment platform. The real estate private equity fund manager also has another planned that will invest across Asia, Christina Gaw, managing principal and head of capital markets, told AsianInvestor.

Adia also declined to comment on other questions put by AsianInvestor but was willing to check information for accuracy.

Christina Gaw

Asked about the thinking behind Adia’s move, the unnamed executive said: “The Covid-19 pandemic has accelerated many of the digital and technology trends already underway globally, from online health to education to remote workplace services.”

Investment themes certainly don’t get a lot hotter than data storage these days, even as real estate sectors such as office and hospitality suffer from flagging demand.

Total data centre transaction volumes in Asia Pacific totalled $5.7 billion between 2018 and 2020, 7.2 times the figure between 2015 and 2017, according to property services firm Cushman & Wakefield.

Moreover, China’s data centre market is set almost to treble in size from $13 billion last year to $36.2 billion by 2025, estimates Mordor Intelligence, an Indian research firm. The market will register a compound annual growth rate of 19.2% over that period, said a report published by the company last month.

Adia has invested in Chinese data centres via public markets in the past, but the Gaw deal is the first direct real estate investment into these assets, noted the anonymous source. The fund has invested into Gaw real estate funds for more than 10 years and alongside the Hong Kong firm in multiple real estate deals.

This is a natural evolution because Adia has also allocated directly into the sector elsewhere and has been steadily building up its private market investment capabilities. It has reduced its use of external managers from 75% to 45% over the past 10 years, said the Sovereign Wealth Funds 2019 report published in March by Icex-Invest in Spain and IE Business School in Madrid.

TARGET RETURN

Gaw is aiming for an internal rate of return of around 20% for the data centre platform, and the unnamed executive quoted a similar target: “Market participants generally target percentage yields in the low- to mid-teens for development projects in China."

Gaw Capital will not offer any co-investments via this platform, added the source. Christina Gaw confirmed that fundraising was complete for the deal pipeline her firm had identified initially but said that it would offer a second platform “for more pipeline deals and a vehicle targeting Asia regional internet data centre investments”.

The demand is clearly there: Gaw launched the fundraising at the end of last year and "more or less" completed it in six months despite the onset of the pandemic, she said.

“Demand for online activities and data increased as a result of Covid,” Gaw added. “It is a perfect sector to be in for what we will continue to see – increasing online activities.” 

Of course, high demand breeds more competition and higher prices, something that both Gaw and the anonymous executive acknowledged. “The sector is becoming very competitive,” Gaw said, “so having strong operating partners like [Chinese company] Centrin [Data Systems] will [help us] differentiate [our offering].”

But the high prices look justified for the time being, as investors are struggling to find suitable assets, particularly in Asia.

Meanwhile, Adia is committed to real estate opportunities in China in general and continues to explore and evaluate new investments across different sectors. Renewable energy is another area into which the fund has been eagerly moving in recent years in Asia, notably in India, said the Icex and IE report.

This story has been updated to reflect that the return targets for the data centre platform, as cited by Christina Gaw and by the unnamed source, are similar.