LOS ANGELES – As someone whose investments have helped shape the modern data center industry, it’s not surprising that Rick Magnuson is a long-term believer in the industry’s growth.
“This is not some sort of bubble,” said Magnuson, the founder and executive managing director of private equity firm GI Partners and chairman of data center REIT Digital Realty Trust. Magnuson was the keynote speaker in Monday’s opening day of the IMN Forum on Financing, Investing and Real Estate Development for Data Centers.
“This is strong, secular growth,” Magnuson said. “We’re pretty comfortable with the fact that more data centers will be needed. The trends remain strong and the content being pushed through the Internet has to be stored somewhere.”
Netflix’ Traffic Share Grows
The leading example is video content, which is a growing component of Internet traffic. Magnuson noted new data showing that streaming video from Netflix now represents 20 percent of the evening Internet traffic in North America.
“Internet video has really become the killer app,” said Magnuson. “It all has to be shoveled through a data center. It’s all replicated and has to be stored proximate to its delivery.”
That type of data growth will also be seen in other industries and verticals, Magnuson said, underscoring importance of data center facilities to store and deliver the data powering the Internet economy. It’s a forecast that was reinforced by a number of speakers and panels at yesterday’s IMN event in Los Angeles, which outlined the opportunities for investment in the data center, colocation and hosting facilities.
But the optimists were fewer in number back in 2001, when Magnuson founded GI Partners. At the time, the data center industry was entering a prolonged slump amid an oversupply of space. That period is often referred to as the “Field of Dreams” era, when leading data center and colocation providers borrowed heavily to pursue a strategy of “build it, and they will come.” When the Internet market crashed, the customers never came, and many of the overbuilders wound up in bankruptcy, leaving data centers sitting empty, to be sold for pennies on the dollar.
Contrarian View Pays Off
GI Partners stepped up to buy many of them. “Back then data center investing was an oxymoron,” said Magnuson. “That’s why we, as contrarians, did very well.”
The first investment fund raised by GI Partners was used to acquire the data centers that formed the nucleus of Digital Realty Trust (DLR), which went public as the first real estate investment trust focused ont eh data center sector. That first fund also invested in Savvis, a manged hosting provider focused on the financial industry that became one of Digital Realty’s largest tenant.
GI Partners’ second fund was used to acquire The Planet and EV1 Servers (which then merged) and the colocation and interconnection specialist Telx. The third fund went to work early this year, leading a mangement buyout of SoftLayer and teaming with Oak Hill Partners to acquire ViaWest.