Data centers are the new AI darling, and Blackstone (NYSE: BX) isn’t shying away

Blackstone (NYSE: BX)—one of the largest alternative investment management firms in the world—is betting big on data centers, shifting away from office buildings as it expects AI to transform global economic infrastructure on a scale comparable to the widespread adoption of electricity more than a century ago. 

The company just announced the $16 billion acquisition of Australia-based AirTrunk, a leading provider of hyperscale data centers in the Asia-Pacific region, and it says nearly $2 trillion will flow into the sector over the next five years. That’s serious money that could make skeptics of the much-hyped sector reconsider their outlook. The facilities offer a more measured way to participate in a growing industry, as infrastructure services will be needed regardless of which individual hardware, software or cloud computing companies come out on top. 

Blackstone’s biggest data center asset is its QTS portfolio company that has expanded capacity seven times since 2021, and CEO John Gray said the firm is positioning itself to become the largest investor in AI infrastructure in the world. He used the company’s latest earnings call to detail a repositioning away from office space in the US to warehouses, rental housing and data centers, with those three sectors now accounting for 75% of the firm’s global real estate portfolio compared to 2% in 2007. 

“I believe the consequences of AI are as profound as what occurred in 1880 when Thomas Edison patented the electric light bulb,” he said. “While it took years to develop commercially viable products, the subsequent build out of the electric grid over the following decades has parallels to the creation of data centers today to power the AI revolution.”

Gray said he was seeing particular interest in the sector from investors like insurance companies who favor fixed income products because of their steady cash flow and long-term growth prospects. “It feels to us like a very big market,” he said. “Early days in terms of penetration.”

The strategy seems to be working for Blackstone, with data centers being the single largest driver of gains in the second quarter. The asset manager, whose shares have risen 25% over the past year, has outperformed competitors including Apollo Global Management (NYSE: APO), Partners Group and Carlyle Group (NASDAQ: CG). Apollo seems to have taken note, with its CEO saying recently that it’s planning to spend “an awful lot of money” trying to do the same thing.

McKinsey & Company says that growing demand for data centers has attracted growth capital, buyout, real estate and infrastructure investors, all of whom are drawn to the “steady, utility-like cash flows and risk-adjusted yields.” While it said that margins could start to come under pressure with all the new competition—even as demand grows 10% a year through 2030—the consulting firm said there will still be numerous “upstream opportunities.”

“Potentially attractive opportunities lie in other parts of the data center value chain,” it wrote in a report. “Investors might focus on individual elements or invest where elements intersect—modular solutions for edge data centers, for example…Investors that already own data center assets could also consider vertically integrating critical elements across the value chain.”

Much of the excitement surrounding the widespread adoption of AI platforms has centered around chipmaking firms and software giants, but the increasingly large flows of institutional money are beginning to pay attention to the nuts and bolts making it all possible. That means that data infrastructure companies like Datadog (NASDAQ: DDOG), Digital Realty (NASDAQ: DLR), Equinix (NASDAQ: EQIX) and American Tower (NYSE: AMT) could all be poised to benefit as the sector matures. Blackstone’s early investment, meanwhile, is giving it a head start and may make it better prepared than its competitors to capitalize on the opportunity.