In the world of funds for data center businesses in North America, expect to continue seeing a very active lending and private-equity market throughout the rest of the year, as well as more mergers and acquisitions. Steve Lee, managing director at Bank Street Group, adds that all eyes will be on CyrusOne, watching closely the results of the provider's conversion into a real estate investment trust (REIT).

Carrollton, Texas-based CyrusOne went public and started operating as a REIT in January. This is somewhat of a trend, since Equinix, the global data-center-market gorilla, announced last year it would to the same. The Silicon Valley-grown giant's board approved the move in September 2012. If all goes well, Equinix plans to start operating as a REIT in the beginning of 2015.

Steve Lee, of Bank Street Group, will join Sapience Capital and Sabey Data Center Properties in a panel discussion of the state of captial markets for data centers at the upcoming DatacenterDynamics Converged conference in New York City

The reason these two announcements have piqued the interest of other players in the market is that the others are wondering whether they should do the same, Lee says. Companies want to make sure they structure themselves in the best way possible, and taking a company public as a REIT currently seems like a plausible “exit”. CyrusOne raised north of US$313.5m through its initial public offering (IPO), and its shares jumped more than 10% as soon as they began trading on Nasdaq. Equinix' shares went up more than 13% after it announced the board's decision.

Lee expects to see more acquisitions of data center providers by telcos, akin to the string of deals in 2011, including Time Warner's NaviSite deal, CenturyLink's purchase of Savvis and, of course, Verizon's Terremark acquisition. Last year also saw a few similar deals in Canada: Cogeco bought Peer 1 and BCE bought Q9. There is still a number of cable companies that have not bought any data center firms, so there is room for more consolidation in this vein, Lee says.

On the debt front, “there is still a lot of capacity and a lot of demand from capital providers,” Lee says. Deals get priced at multiples of EBITDA, and lenders want more. “Typically for senior debt, you saw [deals] somewhere in the range of 3.5 times [EBITDA] as the upper limit,” he says. “Now there are deals that are more aggressive than that.”

There is still a specific kind of data center companies lenders are looking for, however. They have to be developments of substantial size – a data center with EBIDA below $10m, for example, will be difficult to finance – and they have to have anchor tenants. Companies that already have one, two or three data centers find it a lot easier to find financing than others. It is still very difficult for a data center start-up to get outside funding.

Overall, many new players on both debt and private-equity sides that have not been in the data center game before, are looking for ways to get in. This has created pent-up demand for operating data center companies that have a track record and scale. These “deals are harder to find, because there are so many investors looking for the same deal out there,” Lee says.

Finally, there is a lot of interest in companies with business models focused on second- or third-tier US data center markets. There is demand in these markets and less competition. These markets also offer more stable pricing and more intimate relationships with customers. Multiple companies out there have multi-market business plans that are focused exclusively on these lower-tier markets. “There is a strategy there that makes sense,” Lee says.