Real estate money managers are pinning their expectations for a recovery on mergers and acquisitions, hoping to help them capitalize on an expected infrastructure boom — or simply gain scale to survive.
Managers are looking to merge with infrastructure or other real estate firms to put themselves in a better position to take advantage of the energy transition and its need for cleaner power supplies, a potential real estate upswing and the AI-driven data center infrastructure boom. At the same time, old definitions are breaking down, with data centers slipping into both real estate and infrastructure portfolios, giving both types of firms access to the blazing hot sector.
These managers expect data center demand to continue, despite the emergence of Chinese AI disrupter DeepSeek, which offers AI requiring less energy and at a lower cost. And for some other real estate firms, a merger or acquisition with a large multi-asset manager or a real asset manager is seen as a route to survival as they wait for real estate to re-emerge.
Between 2022 and 2024, there were 19 announced acquisitions of infrastructure managers or real estate managers, up from five from 2017 through 2021, according to research by executive search firm Ferguson Partners.
Infrastructure is rapidly growing in capital raising and deployment while “real estate has been on its back,” said William J. Ferguson, co-chairman and chief executive officer. “They can create efficiencies by having shared abilities for fundraising.”
And smaller real estate firms are merging to survive, he said. Real estate returns have been lackluster.
The NCREIF Fund Index –Open End Diversified Core Equity return was -2.3% for the year, 1.99% for the five years and 4.94% for the 10 years ended Dec.31. Meanwhile, managers raised an estimated $140.2 billion and
$138.4 in 2024 and 2023, respectively — the worst fundraising years since 2016 when the real estate managers worldwide closed on a combined $130.1 billion, according to Preqin's Future of Alternatives report.
By comparison, worldwide infrastructure managers' total assets under management were set to reach a new high of $1.4 trillion in 2024, with fundraising in 2024 staging a comeback to $113 billion, after falling to $92.4 billion from its 2022 peak of $164 billion, Preqin said.
At the forefront of this renewed interest in infrastructure is artificial intelligence and the expected demand for data centers and energy alongside it, Ferguson said.
“Managers can raise a lot of money (for infrastructure) and the AUM is stickier,” he said.
Managers invested more in infrastructure when real estate cooled off, Ferguson said, adding “2023 and 2024 were the slowest years I’ve seen in real estate in 40 years,” he said.
Demand for data centers
Some real estate firms are acquiring or merging with smaller infrastructure firms to expand into the digital infrastructure, or data center, area.
In September, the $18.2 billion real estate and fixed income manager Boyd Watterson Asset Management merged with London-based digital and other infrastructure manager Amber Infrastructure Group. In May, European managers Cain International, a private markets firm with $15 billion in real estate equity and debt and a $1 billion private equity business, announced plans to merge with $1 billion real estate manager Blackbrook Capital, which invests in logistics and warehouse as well as strategic investments in digital infrastructure/data centers.
Bigger managers are getting into the action, too.
On Feb. 24, Apollo Global Management announced the acquisition of Bridge Investment Group, a $50 billion real estate manager just a month after announcing the acquisition of $6 billion Argo Infrastructure Partners, which invests in digital infrastructure as well as renewable energy, transportation, utilities and other industries. As of Dec. 31, Apollo had approximately $751 billion of assets under management.
During Apollo’s Feb. 8 earnings call, Apollo CEO Marc Rowan called the Argo deal “modest M&A” in infrastructure.
“If you think of Argo as the prototype, we have a large, but not yet fully scaled infrastructure climate business. Argo adds 20-plus originators with a proven track record who have been originating against a relatively small box, $6 billion of AUM,” Rowan explained. “We're getting 20-plus qualified individuals, $6 billion of AUM, a full-scale business you should expect us to continue to build origination capabilities in our hybrid and real asset businesses.
“You should expect us to continue to do modest M&A along these same lines where we are quite focused on increasing our capacity to originate,” Rowan said. “That is what we intend to do.”
The Bridge deal looks to hypercharge Apollo’s real assets business, boosting real estate to $110 billion pro forma AUM when the deal closes in the first half of 2025 from $77 billion now, according to Apollo’s presentation on the deal.
Massive opportunity
Larger firms with both real estate and infrastructure arms are promoting their infrastructure abilities, while de-emphasizing their lagging real estate businesses, sparking a growing convergence of the two asset classes.
“The biggest trend among the PERE (private equity real estate) firms is real estate and infrastructure being organized under one real assets leader as was recently announced at KKR,” Ferguson said.
At Apollo’s investor day in October, firm executives stressed the “massive opportunity in real assets” including a $10 trillion to $12 trillion addressable market in real estate, $15 trillion to $20 trillion in digital infrastructure,
$30 trillion in power and utilities, and $30 trillion to $50 trillion in energy transition. Apollo does not break out its infrastructure AUM, according to an Apollo spokesman.
In October, BlackRock closed its acquisition of $100 billion infrastructure manager Global Infrastructure Partners, which Ferguson said is a premier infrastructure firm. At closing, BlackRock’s infrastructure business had $170 billion in assets under management, according to a news release.
In January, KKR combined its $80 billion real estate business with its $77 billion infrastructure business into real assets.
Blue Owl quietly did the same thing right before its investor day on Feb. 6.
For KKR, the recent performance news was better. Infrastructure was KKR's best-performing business, up 2% in the fourth quarter and 14% in the same periods, KKR reported in its Jan. 4 earnings release. By comparison, real estate was up 1% on a gross return basis in the fourth quarter and 4% in the 12-months ended Dec. 31.
“With the growth in overall data generation, cloud, and AI, there's just a need for much more compute (computational power),” said Craig Larson, a partner and head of investor relations during KKR’s Feb. 4 earnings call. “So, there's little question in our minds that long-term data center, power, infrastructure demand is growing.”
DeepSeek, a Chinese startup that offers an AI-run chat box, “introduced questions on the demand side (for data centers) that really focused on how much and where,” Larson said.
Across KKR's data center investments since its $15 billion deal to take global data center real estate investment trust CyrusOne private in 2021, the investments have been driven by “by cloud demand and the AI dynamics have all been upside,” he said.
Blue Owl Capital joined the party on Jan. 3 when it closed the acquisition of data center manager IPI Partners, which had about $10.5 billion in assets under management as of June 30.
The data centers sector investment opportunity could be in the trillions of dollars, said co-CEO Marc S. Lipschultz during Blue Owl’s Feb. 6 earnings call.
The digital infrastructure market is expected to exceed $1 trillion of total construction need over the next few years, Blue Owl’s Feb. 7 investor day presentation said.
The IPI deal is already a money maker for Blue Owl, Lipschultz noted. The IPI acquisition added about $14 billion of AUM on a pro forma basis, including $3.3 billion raised in the fourth quarter before the deal closed, Lipschultz said.
“Since the transaction announcement, AUM has already increased 35%, driven primarily by capital raising,” Lipschultz said. “We expect to finish up the current vintage of our flagship digital infrastructure fund at the hard cap of $7 billion in short order.”
Lipschultz sees DeepSeek as an example of the continued demand for digital infrastructure.
"It's hard to reach a conclusion other than what it tells us, that AI is happening more, faster, broader. That's great news for our strategy," he said.
Before the DeepSeek news, executives at Ares Management in October announced a $3.7 billion deal to acquire real assets-data center manager GCP International, which has $44 billion in assets under management.
Ares executives voiced few concerns about DeepSeek's impact on the data center investments. GCP International focuses on new economy sectors such as industrial, digital infrastructure and self-storage
“I think the markets are still trying to digest what DeepSeek actually means and there's maybe conflicting views as to what exactly the cost and investment to train those models actually was,” said Michael Arougheti, CEO and a co-founder of Ares during the firm’s Feb. 5 earnings call. He said his long-term view is that demand for computational power will continue, which "will not change the opportunity to build data centers with good counterparties in good locations.”
Arougheti said that from his perspective the move was always to lower costs and increase “And what we have seen with technological advancement and greater efficiency, we will typically see increased demand,” Arougheti said.
“Most of the sites and plans for development that we have are catered towardsdata centers and cloud migration with what I would call upside for AI, meaning that the client can elect to have that optionality in the way that we've built the data center for them,'' he explained.
And data centers are still a healthy investment opportunity, he said. There is not enough capital to satiate the demand which is estimated to be a $4 trillion to $7 trillion annual opportunity, Arougheti said.
Dethroning real estate
Blackstone executives are also leaning into infrastructure as its once-storied real estate business shrinks, foreseeing a huge investment opportunity in digital infrastructure despite DeepSeek.
Speaking on Blackstone’s Jan. 30 earnings call, Jonathan Gray, president and chief operating officer, said that while the cost of computational power “is coming down pretty dramatically” with DeepSeek and other A.I innovations, that lower cost will lead to more usage.
“So, we have a sense, and in talking to our clients also, that there’s a belief as usage goes up significantly, there’s still a vital need for data centers,” Gray said. “The form of that use may change.”
This is good news for Blackstone, which is heavily relying on the sector for future growth.
Blackstone, known for its successful real estate business that Gray formerly helmed, credited infrastructure with the firm’s most recent success.
“The largest single contributor to the firm's financial results in the fourth quarter was our dedicated infrastructure strategy BIP (Blackstone Infrastructure Partners), which generated $1.2 billion of fee revenues,” said Stephen A. Schwarzman, co-founder, chairman and CEO of $1.1 trillion Blackstone during its Jan. 30 earnings call.
“BIP has delivered remarkable investment performance since inception only six years ago, including 17% net returns annually for the comingled (fund) strategy.”
Indeed, infrastructure has helped to dethrone real estate as Blackstone’s largest business.
As of Dec. 31, Blackstone’s real estate portfolio dropped to $315.4 billion from $336.9 billion. Real estate is now Blackstone’s second to smallest business, beat out by credit and insurance with $375.5 billion in AUM and private equity at $352.2 billion. The smallest was Blackstone's $82.4 billion multi-asset investing business.
Blackstone boasts an $80 billion data center portfolio, which its executives say is the largest in the world. Blackstone’s infrastructure, which is part of the firm’s private equity business, exceeds $120 billion, Schwarzman said on the earnings call. Blackstone launched its first infrastructure fund in 2018.
“The team has done an exceptional job portfolio construction focused on compelling thematic areas, including digital infrastructure, energy and power and critical transportation infrastructure,” he said. “We envision a growth path for our infrastructure business that parallels that of our real-estate business, including geographic expansion, new client channels, moving across the capital structure and risk-return spectrum.”
Last year, Blackstone launched a European infrastructure perpetual vehicle and in January, the firm launched an infrastructure vehicle for retail investors, Schwarzman said.
“Over time, we also see opportunities in Asia, the potential for sector-specific strategies,” he added.