Financing the AI Boom 2

SoftBank's $4 billion shortcut to a $7.2 trillion opportunity

Until data centers can be launched into space, they remain bound by earthly constraints. Rob Roy understands this well. As founder and CEO of Switch, he operates over 20 data centers across the US, including a large campus in Las Vegas.

Vegas is as good a location for a data center as you could find. Low year-round humidity reduces corrosion risks for sensitive IT equipment and low night-time temperatures help with the cooling process. It’s a short hop to California and Silicon Valley – latency is just five milliseconds. And energy is cheaper than in other parts of America, no small consideration given Switch is already NV Energy’s largest customer and on track to consume a third of the state’s energy supply.

Rob Roy has been building data centers for 25 years. He developed a modular system for their construction and has more than 700 patents to his name. His latest project is a site, in Las Vegas, purpose-built to support the extreme density demands of next-generation AI workloads. Roy’s design features hybrid air and liquid cooling systems engineered to power and cool more than two megawatts (MW) per server rack. Roy reckons that although current generation chips consume only around 150 kW per rack, consumption rates are only going up and data centers need to be ready. “These aren’t just cryptosheds,” he says of his data centers.

Roy’s data centers are in demand. The top ten sites, covering 2 million square feet, offer capacity of around 130 MW but the company has leased approximately 160 MW. Average customer tenure is five years, with churn running at less than 2.5% a year, confirming that tenants stick around. The ten largest account for 52% of revenue, so even if one does leave, it doesn’t impact the company too much. Overall, the portfolio brings in over $400 million a year of leasing revenue and costs $125 million to manage – power being the biggest expense.

The problem is that it is a capital-intensive business to run and there is no more earthly constraint than financing. Switch addresses this by issuing bonds secured on its data center operations. In October, it raised $660 million in the asset-backed securities market, its fourth such foray into the market, to bring its total issuance to $3.5 billion. You can buy Switch series 2025-2, class A-2.1 bonds at a yield of around 5%. Data centers backing the bonds have an appraisal value of around $4.7 billion, leaving investors with a wide valuation buffer to give them comfort.¹

The company has also tapped other financing markets and has $10 billion of loan facilities arranged by JPMorgan and TD Bank. It also relies on equity financing. Switch listed on the New York Stock Exchange in 2017 but was taken private five years later by a consortium led by private equity firm DigitalBridge at an equity value of $11 billion. DigitalBridge currently owns 56% of the company, with Switch management holding 7% and Australian asset management firm IFM holding the remainder.

There is no doubt that data centers are a hot property right now. We discussed the asset class last year in Financing the AI Boom. Since its acquisition, new financing sources – such as asset-backed bonds – have opened up for Switch, and its equity value has appreciated. A story last year suggested that Switch may now be worth $50 billion including debt.

One potential buyer is SoftBank, whose founder Masayoshi Son (subject of another of last year’s Net Interest issues, The Bank Inside SoftBank) has ambitions to ride the AI-fueled boom in digital infrastructure. Son knows Switch well. He already owns chip design company Arm, which works with Switch. As a Las Vegas Raiders fan, Arm CEO Rene Haas often passes through town to visit.

But $50 billion is a lot of money. An acquisition would ratchet SoftBank’s self-defined leverage ratio up from 16.7% (including the stake in OpenAI it just bought) to over 35% – above the 25% limit it sets “under normal market conditions” and the 35% threshold it allows for “exigent circumstances”. SoftBank may yet find a way round this but perhaps the cleverest of all is just to buy DigitalBridge. On December 29, SoftBank announced a full acquisition of DigitalBridge for an enterprise value of $4 billion. Why spend $50 billion on a single data center operator when you can spend $4 billion for a stake in the economics of a whole portfolio of them?²

As we discussed in The Bank Inside SoftBank, Masayoshi Son is a master at deploying leverage to achieve his ambitions. Buying a private equity firm that uses other people’s money to dominate an industry is the latest iteration of that. To uncover what he sees in DigitalBridge and what the acquisition says about the state of private equity, read on.