Data center owners are turning to the infrastructure secondaries market for capital, and getting pushback over unrealistic valuations, says Eddie Keith, Partner and Head of Infrastructure Secondaries in the Ares Secondaries Group.

In a fascinating conversation, Keith tells sister channel Liquid Courage how digital infrastructure has rapidly evolved from a fringe asset class into one of the most active and compelling corners of the secondaries market, driven by capital needs that outpace what traditional fund structures can accommodate.

Keith draws on nearly two decades of secondaries experience to lay out what separates a smart infrastructure secondary from a trap, why the asset class rewards diversification, and the criticality of mature cash-flowing assets anchored to a strong development pipeline.

Among the key takeaways:

• Troubled data center deals are of no interest to infrastructure secondary buyers. If a GP can't sell an asset through a traditional process, bringing it to the secondary market as a last resort is a signal to run — not a reason to look harder.

• Data center execs have inflated expectations on value. Some data center owners have valued their platforms at 1.3 to 1.4 MOIC, but due diligence done by infrastructure secondaries buyers have revealed valuations more in the 0.8 to 1.0 range. A data center owner will be hard pressed to sell assets at strong multiples without future revenues supported by contracted cash flows.

• Distressed secondary deals have been 'some of the worst.' The continuation vehicle market was born out of post-financial-crisis distress, and those early deals — broken assets from broken franchises that secondary capital was supposed to rescue — turned out to be some of the few reliable ways to lose money in a market with a thirty-year history of generating returns.

• LPs should not overallocate to digital infrastructure. Infrastructure investing moves in waves — digital was considered fringe before COVID made it the belle of the ball — and the investors who stay diversified across the full asset class are the ones who don't get caught over-indexed to last cycle's darling.

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Data Center Deals are Appearing on the Secondaries Radar

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Data Center Deals are Appearing on the Secondaries Radar