It’s a good time to be in the data center business.

Every week brings a story of a new billion-dollar development, as the industry races to keep up with an AI explosion. Existing operators and suppliers have seen valuations soar, while GPU maker Nvidia’s share price has rocketed to astronomical levels.

UK-based Kao Data, which made an early bet on supporting high-density racks, is no different. Backed by Legal & General, Goldacre, and Infratil, it has ambitious plans to expand across Europe and upgrade its existing sites.

When DCD speaks to CEO Doug Loewe, on the eve of his six-month anniversary at the company, he is confident that he can build upon the foundation laid by the company over the past decade.

“I'm now driving projects towards completion,” he says. “There were some seeds that were planted five years ago, we just need to make sure they are germinated and are brought to fruition. If you start from a cold start, you're at a real disadvantage at this stage of the evolution of our industry, because you need to have been in there getting power, for example.

“You're going to hear some new startups that are coming forward, but unless they have picked up some kind of historical opportunities or contracts that are already in motion, they're going to have some real challenges, because the industry is moving at an accelerated pace, and human capital is just as scarce as power or permitted land.”

But behind all the excitement about that acceleration, a growing sense of unease is seeping through the industry. The extreme spikes in valuations, the lack of clear AI business models, and the echoes of the dot-com era of excess all have operators nervous about a fall coming.

One bad Nvidia quarter could start a domino effect, upending the market’s faith in AI’s potential, and felling those that weren’t ready.

In a wide-ranging discussion at the company’s London offices, we sat down with Loewe to understand how he’s insulating his business from the risk of AI.

Riding the wave

Supporting 40kW racks air-cooled and 100kW liquid-cooled, the company has long managed to attract AI and high-performance computing customers. Kao’s Harlow campus scored Nvidia as a customer in 2021 and also hosts the Wellcome Sanger Institute and Arm, among others.

“The key is, even though AI is our heritage, we did not just become a pure-play AI business,” Loewe says. “Although it's incredibly lucrative, the fill rate isn't as fast as most people think, there's some companies right now that are still expanding AI only in their respective data centers. They haven't begun to distribute it, either by using third-party colo or even third-party network locations.”

Instead of going all in for AI, Loewe says that Kao sticks to an ‘ACE’ strategy - that is, AI, cloud, and enterprise. “Having that diversified customer base is our differentiator,” he says.

Loewe continues: “We're not pure enterprise, which can be very profitable, but the fill rate is very slow. If you're looking for growth, that alone won't solve the equation.”

Then there’s cloud: “If you do pure cloud, I often refer to it as the heroin habit,” he says. “It’s so consuming, it's so absorbing of capacity that you're like, ‘let's not do enterprise, let's just do cloud.’” That leaves you at the mercy of the hyperscalers, with tough margins and little to differentiate from others.

The three portfolio types are, of course, not fully distinct. “You potentially have embedded AI within the cloud,” says Loewe. “That's a situation you can solve by having a Microsoft build within our data centers to deliver workloads that support both their traditional cloud business and their AI.

“What you do in that situation is you give them 100MW, and they can start filling the data center from one end with their cloud, and you can fill the other end with AI and, just by definition, you de-risk their whole model, because it's blended. You don't have to make that decision at the beginning, because no one could forecast how quickly those those respective segments are going to grow.”

Similarly, enterprises are looking into doing their own AI, with the high-density deployments too large for their own data center footprint.

Finally, there are the GPU-as-a-Service and AI cloud companies like CoreWeave, Lambda, Paperspace, Taiga, and others.

“Some of them are going to be wildly successful,” Loewe says. “I tend to see one or two of those potentially having a market cap that rivals a Microsoft or even Nvidia itself over the long term. But with that said, there are going to be x number, 20 or 30, that are going to be roadkill.

“It's very much like when the dot-com bubble burst.”

It’s impossible to know which of the companies will survive any coming collapse. But there are indicators a data center operator can look to - “it all depends on how they are being financed, what their investors’ time frames are,” Loewe says. “We learned the cost of capital for some of these GPU-as-a-Service companies is anywhere from 13 plus percent. That's like putting it on your credit card.

“And so that's not sustainable for some of the companies. Others are backed very, very well. But we can't say for certainty which ones are going to be the winners or which ones are the losers.”

With that in mind, it might be easier to keep away from AI companies altogether. “You avoid at least being participatory in that sector at your peril,” Loewe cautions. “You're just going to completely miss the boat.

“But if you've bet on the wrong one, you potentially could be big trouble.”

For Kao, avoiding that trouble comes in several forms. “Depending on who that company is and how they're backed, you can ask for first year and last year's rent upfront, and that de-risks it fairly well.

“You make sure the term of the agreement is ideally 10 years. If they went five plus five, and there's a break, you potentially have some kind of recovery mechanism for some of the other upfront costs.”

Another step one can take is to find the ultimate end customer that will be using the GPUs - if it is one large client. That customer could potentially underwrite the asset and have step-in rights to take over the lease should the GPU company fail.

The other part is to not over-rely on any of these companies. “We have a portfolio of locations, a portfolio of customers and, if one hits the jackpot, we’re great,” Loewe says. “But if one of them potentially goes out of business, it doesn't impact the overall integrity of Kao Data.”

Across its ‘ACE’ portfolio, “you want to make sure you have a statistically valid sample size of customers,” he says. “Don't bet the farm on one.”

Moving beyond Harlow

Kao isn’t betting the farm on one site, either. Its Harlow campus, which will eventually support 80MW, was joined in 2021 by two other UK facilities, in West London and Slough.

The West London site, a diminutive 4MW facility, was acquired from Barclays and partially leased back to the bank. The rest was leased to a cloud provider.

The 16MW Slough site was redeveloped in 2023, and targets companies across the ACE spectrum.

Now, the company is looking to build the north’s largest data center with a foray into Manchester. It broke ground at its new site in October.

“Our initiative by building a £350 million ($461m), 40MW data center in Manchester is to distribute the compute regardless of the initiatives or investments [from the new UK government],” Loewe says.

“I don't think we need a half gigawatt data center in the UK, instead of killing everybody with these short-term enormous capital investments that are going to be required and take time, the industry can help society by embracing a more distributed approach.”

Kao also plans to distribute its compute across the continent. “There's no space and power in the United States,” Loewe says, so “companies that want to have their business plans be successful are just going to have to do it on a distributed basis.

“London is the natural landing point, because Dublin is saturated, but then they come to Europe.”

The company is in due diligence now for “an inorganic play in both Frankfurt and Berlin.” At the same time, “the team was in the front of the queue for a nontrivial amount of power in Amsterdam,” despite the region’s historical friction with the data center sector.

Kao is also looking to Barcelona to act as an alternative to Marseille. “It's really a single vendor in Marseille,” he says, referring to Digital Realty. “It's in an incredibly wonderful location, it's the seventh most interconnected Internet point in the world because of the subsea cables coming in, but the industry is looking for an alternative to that.

“We're putting our hat in the ring to be able to be participatory in that. We believe that Barcelona is a great example where you can have a second cable landing location on the Mediterranean solve for large AI workloads, because it supports and mirrors the Nordics with cost-effective electricity.”

An undisclosed cloud provider is supporting Kao’s Barcelona push, alongside another project in Madrid. About a third of the capacity of its European sites will go to anchor tenants that are existing clientele.

“We're not doing the Nordics, we're not doing Eastern Europe, we're not doing France, we're not doing Italy, not doing Ireland. So people like, wow, that's that's a lot you're leaving,” he says. “We want to be able to really focus in on those seven locations, those four countries, and be just as good as we were with the three incremental ones in the UK for the last 10 years.”

Seven points

Having seven sites acts as another de-risk. The eggs are spread across seven baskets, with the company able to begrudgingly swallow any single customer failure.

That said, should the bubble burst hard and fast, the impact could be much wider. It may not just take down one customer - and could decimate a number of other users of rival data centers, just after the largest data center buildout phase in history.

For those still looking for data center space, prices could crash as it becomes a buyer’s market.

“When, all of a sudden, it starts to be a feeding frenzy - this is three to five years out - and we [as an industry] have overbuilt, you'll see a flight to quality,” Loewe says.

“One of the reasons the cloud provider was thrilled to move in with us is not just today the space, but there's a history of consistent on-time delivery. More often than not, what makes or breaks your organization more than the timely delivery of new capacity is, how are you operating successfully with your installed customer base?”

Another risk - or opportunity - is that struggling data center companies will be picked up en masse by savvy investors, willing to wait for the market to inevitably return. “I think there's definitely a situation where a roll-up play could occur, real estate money coming into the sector that might go, ‘Hey, these platforms are trading at a discount. That's very much a possibility.’”

That could create a powerful new competitor, but again Loewe points to quality as a defensive moat.

For now, with talks of a bubble still hypothetical and hyperscaler capex still rocketing, Loewe and the wider data center market are still confident in growth and prosperity. Where possible, he says has tried to de-risk the expansion with caution and diversification.

But, he admits: “You can never ever, by definition, shield yourself from systemic risk.”