UK pension schemes being encouraged to increase investment in private markets could find a significant opportunity in the rapid expansion of data centres, according to Investment Performance Services (IPS) president, Jennifer Mink.

Speaking to Pensions Age, Mink noted that artificial intelligence (AI) had transformed data centres from a relatively small real estate subsector into what she described as a “trillion-dollar asset class”, widening the range of ways pension investors could gain exposure.

She cited McKinsey estimates that data centres will require $6.7trn of capital investment globally by 2030, equivalent to around 1 per cent of global GDP annually, as demand for computing power rises.

“Data centres are not new, but AI demand has moved them to the forefront of attention for both investors and the public,” Mink explained.

“AI has the potential to be a genuinely transformative technology, and data centres are the infrastructure that makes it work. Investors have identified them as the primary ‘picks-and-shovels’ way to participate in the AI growth story.”

While IPS advises US Taft-Hartley and institutional pension clients rather than UK pension schemes, Mink said several lessons from the US experience could be relevant as UK policymakers seek to encourage pension investment in infrastructure and productive assets.

In particular, she argued that the main constraint on deploying pension capital was generally the availability of investable projects rather than institutional demand.

“The current data centre buildout illustrates the point: where projects offer competitive risk-adjusted returns, institutional capital arrives readily and at scale,” she claimed.

“Where deployment has lagged, the cause has more often been a shortage of shovel-ready, well-structured projects and physical bottlenecks such as power, grid connection, and permitting.”

Mink added that the investment characteristics of data centres could also align with pension liabilities, particularly once assets have reached the operational stage.

Stabilised data centres typically offer long-term leases with high-quality counterparties and fixed annual rent increases or inflation-linked structures, making their return and risk characteristics more akin to infrastructure than opportunistic real estate.

For pension investors, access routes now span listed real estate investment trusts, private core infrastructure strategies, value-add development and data centre debt.

Development strategies can also offer higher absolute return potential through the difference between construction costs and the valuation of a stabilised asset, although investors take on additional construction, power procurement and lease-up risks.

However, Mink warned that the surge of institutional capital targeting data centres created its own risks.

“A wave of new funds has been raised to target the buildout, and when a large amount of capital chases a single opportunity, the risk of overbuilding and overpaying rises," she said.

“Both erode the development spread that underpins the return case.”

She also cautioned that current projections depended on assumptions about AI adoption, monetisation, and improvements in computing efficiency that remained uncertain.

Schemes would additionally need to consider constraints on power and grid connections, technology and obsolescence risk as chip and cooling requirements evolve, planning and regulatory challenges, and concentration among a relatively small number of large hyperscale tenants.

“The opportunity is therefore both larger and more varied than it was even a few years ago, but it carries real uncertainty alongside that growth,” Mink concluded.

“Pension investors need to acknowledge these risks, size allocations appropriately, and favour managers with a demonstrable edge.”

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