- Founded: 2001
- Investment strategy: Control middle-market buyouts in North America in four key sectors: TMT, healthcare, leisure and retail, financial and real estate services. Its real estate arm invests in industrial and logics properties, technology-advantaged real estate such as data centers, residential and mixed-used development, and agriculture platforms focused on the wine industry.
- Key executives: Executive Managing Director Rick Magnuson; Managing Directors Hoon Cho, Alexander Fraser, David Mace, Howard Park, Travis Pearson and Greg VandenBosch; and Managing Director of North American Real Estate John Saer.
- Headquarters: San Francisco
- Assets under management: $12 billion
- Fundraising status: GI Partners Fund IV closed on $2 billion hard cap in April 2014.
- Active portfolio companies: Nine
- Web address: www.gipartners.com
GI Partners has been acting like a bit of a downtown hipster when it comes to its recent investments in data centers.
A string of three fresh data center deals in Chicago, as well as the Denver and Dallas areas, illustrate its strategy to focus on real estate located in densely populated areas.
While bigger competitors in the data and storage markets build new facilities out in the countryside where land and power are less expensive, GI Partners has been carving a niche within key metropolitan areas.
The urban data centers may cost more per square foot, but GI Partners said it has been attracting occupants that prefer facilities close to their employees and operations.
“Our strategy is to be close to cities where the end user is — in contrast to a massive build-out in the middle of nowhere,” Michael Wong, director of GI Partners, said in a phone interview.
Wong works on the Menlo Park, California-based firm’s private equity real estate investment arm, which has about $7.2 billion in assets under management, including stakes in data centers, industrial and logistics properties, residential and mixed-use developments and agricultural platforms focused on the wine industry.
So far this year, GI Partners has acquired:
- Synergy Park in Richardson, Texas, near Dallas, a 300,000-square-foot data center leased to affiliates of the University of Texas and a data center service provider. GI Partners invested in the data center through its DataCore separate account, which it manages for the California State Teachers’ Retirement System.
- 601 West Polk Street in Chicago, a 107,000-square-foot property developed in 1918 and updated in 2000 in Chicago’s South Loop, fully leased to TierPoint, a cloud services provider. GI Partners tapped capital from the TechCore separate account it handles for the California Public Employees’ Retirement System.
- 11525 Main Street, a data center in Broomfield, Colorado, halfway between Denver and Boulder. The facility, occupied by TIAA-CREF, is another TechCore investment for CalPERS.
Spotting an opportunity
With its focus on urban data centers, GI Partners is continuing its tradition of spotting value in assets others overlook.
Back in the dot-com bust, the firm recognized an opportunity to invest in major focal points in the Internet infrastructure at reduced prices. At that time, CalPERS requested bids to find a manager for a $500 million separate account for a new crossover strategy for its real estate group. GI Partners won the account and launched its Fund I in 2001 led by Rick Magnuson, founder and executive director of GI Partners.
In the wake of the Nasdaq crash in 2000, GI Partners started buying data centers that had fallen on hard times. It purchased about 24 data centers for a total of $250 million, Buyouts reported in 2012. GI Partners earned nearly 4 times its money after Digital Realty Trust, a roll-up of its data centers, went public on the New York Stock Exchange and the firm exited in 2007. Digital Realty Trust continues to trade and now carries a market cap of about $11.5 billion.
In 2012, CalPERS said it generated a 31 percent net IRR on its investment in Fund I, or a 2.4x return.
Nowadays, GI Partners is investing the TechCore $1 billion core discretionary real estate separate account for CalPERS and the $500 million DataCore LP fund for CalSTRS. Both were launched in 2012 with a buy-and-hold strategy for producing returns.
“These buildings are the most important hubs of the Internet that started out when fiber was being laid 20 years ago — that’s what we want to own on behalf of these institutions,” Magnuson said.
As an example of the firm’s strategy, Magnuson and Wong pointed to the 2013 acquisition of the 30-story One Wilshire building in downtown Los Angeles, a major focal point on the West Coast for Internet traffic.
All told, GI Partners manages about $1.7 billion in data center assets. The portfolio generates a yield of about 7 percent to 8 percent a year in current return, meeting the need by pension funds to receive regular rental income in the form of dividends, Magnuson said.
The yield figure doesn’t include additional gains from property appreciation, which has been happening at a reasonable rate based on the improvement in the overall tech sector.
“It’s a real estate strategy that takes advantage of our technology expertise,” Magnuson said. “Data center investments are a bit of both.”
The deals are structured as traditional real estate investments, but GI Partners brings to bear its private equity tool belt in due diligence, as well as its knowledge of tenants in data centers, and the value of the technology housed there.
Looking ahead, GI Partners has about $700 million in dry powder for more data center deals.
Separately, GI Partners is also investing from its $2 billion GI Partners IV buyout fund that closed in 2014. Some of the deals from that fund focus on companies that may operate in data centers such as Peak 10, a specialist in information technology infrastructure.
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