Small halls, local rules: underwriting data residency

Data residency is a demand signal that most infrastructure underwriting passes over. Where the supervisory authority in a jurisdiction requires regulated records to be held inside the country, a bank, an insurer or a health provider in that jurisdiction cannot buy capacity abroad at any price. The requirement creates demand for halls of two to four megawatts in markets far too small to interest a large operator, and it is the basis of one of the four information infrastructure positions the group holds.

The operator runs three halls of 2.4, 3.1 and 1.8 megawatts in three small jurisdictions, at a contracted utilisation of 74 per cent. Contracts run seven to ten years on a take-or-pay basis and are indexed annually. Private Equity entered the position in 2024 through the Canadian entity, which holds the data and technology investments of the group, and underwrote it to hold rather than to sell, because the buyer list for an asset of this size is short in every one of those markets.

The underwriting priced the tenants rather than the market. In a residency market there are usually between nine and fourteen institutions with both the obligation and the budget to take contracted capacity. The top three tenants carry 61 per cent of contracted revenue across these halls, and two of the three are supervised entities that cannot move their records without the agreement of their supervisor. Concentration of that kind is normally a defect. Here it is most of the security.

Power decides the site. Two of the three halls sit on island grids with limited spare generation and a recorded history of interruption. Both carry contracted backup generation for 72 hours and a fuel supply agreement with a second supplier at a separate berth. The third sits on a mainland grid and needed neither. The underwriting treated the two island halls as a different asset from the third and applied a return requirement 300 basis points higher.

Two developments would impair the position. A change to the residency requirement would remove the reason the tenants are there, and residency rules are policy rather than physics. A large international operator building inside one of these jurisdictions would reprice the contracts at renewal. The division monitors both every quarter: the first through local counsel in each jurisdiction, the second through construction permits, which are public and slow to obtain.

The position distributes 9.2 per cent on invested capital and has grown contracted revenue by 11 per cent a year since entry. It will not be sold into a thin buyer list to demonstrate a realisation. The four tests apply here as everywhere: the advantage is structural while the rule stands, the conversion route is a trade sale that does not presently exist, no better use has been identified for the proceeds, and the accepted loss is 40 per cent of entry cost.

Published 2026-06-16 by the Private Equity division. Research is prepared for eligible counterparties and does not constitute advice.