A 10-Hour Data Center Outage Is Testing the Ambitions of KKR, GIP

Data center operators are fixated on the “five nines” — an expectation that they’ll keep the infrastructure behind financial markets, e-commerce and artificial intelligence running 99.999% of the time.

So as news rippled out last month that a CyrusOne facility in Aurora, Illinois, that handles trillions of dollars in trading volume each day went down for 10 hours, industry insiders were stunned.

To them, it was an eternity, and the failure at the data center outside Chicago is a black eye for CyrusOne’s backers.

KKR & Co. and Global Infrastructure Partners, now a unit of BlackRock Inc., announced their acquisition of CyrusOne in 2021 for $15 billion. They secured billions more in financing for the firm as they deepened their foothold in a booming industry increasingly dominated by the likes of Blackstone Inc. and Blue Owl Capital Inc.

Data centers, the physical embodiment of the AI revolution, are one of the hottest bets in private markets. But as the debate rages over whether the boom is a bubble — debt levels and valuations are climbing — the challenges for Wall Street can be much more tangible: from cooling the space to literally keeping the lights on.

KKR pursued the investment for years and was the driving force behind the deal as it worked to rope in various bidding partners.

CyrusOne touches several of the private equity firm’s major units. Last year, KKR led part of a $7.9 billion loan to the data center operator, co-arranged by its own capital markets team and funded by its Global Atlantic insurance arm alongside some of its clients. And KKR owns its CyrusOne stake through its infrastructure and real estate funds, as well as Strategic Holdings, a unit that holds long-term investments on the firm’s balance sheet.

All that cash wasn’t enough to stave off disaster at Aurora, an older property in CyrusOne’s portfolio of more than 55 operational data centers. A series of missteps by facilities workers at a site running on older systems led to a major outage for CME Group Inc. Such incidents typically require the data center operator to compensate the client, according to people familiar with the industry.

CME entered a 15-year lease at the Aurora data center in 2016, according to a prior announcement.

“They will need to double down on becoming a resilient data center because this is a failure that happened and shouldn’t have,” said Andrej Danis, head of AlixPartners’ Americas telecommunications and digital infrastructure practice.

KKR and GIP said they’re confident in CyrusOne’s strategy and that it’s poised to benefit from growing demand.

“Under our ownership, CyrusOne has accelerated its expansion, enhanced its competitive position while deepening its commitment to innovation, and reinforced its standing as a premier developer and operator of mission-critical data centers,” Waldemar Szlezak, KKR’s global head of digital infrastructure and a CyrusOne board member, said in an emailed statement.

Will Brilliant, GIP’s global head of digital infrastructure and a CyrusOne board member, echoed Szlezak’s remarks in a separate statement.

“We fully support CyrusOne, as we have done throughout our ownership, to invest significant resources to maintain a leading position as a provider of critical data center development and operations services for its customers,” Brilliant said.

For Wall Street, the stakes are high.

Data centers are a key focus for KKR’s infrastructure business, one of the fastest-growing and best-performing strategies for the firm, which is led by Co-Chief Executive Officers Joe Bae and Scott Nuttall. GIP, which announced in October that it was making a bet on developerAligned Data Centers, is central to BlackRock CEO Larry Fink’s ambitions to expand the $13.5 trillion money manager beyond its stock-and-bond roots into more lucrative realms.

n backing CyrusOne, KKR and GIP took on a dot-com-era company with a complex history.

Cincinnati Bell acquired the firm from Abry Partners, before spinning it off. CyrusOne then made strategic takeovers of data centers from other companies through deals with firms including Cervalis, Sentinel Data Centers and Zenium. The Aurora data center, acquired through a sale-leaseback transaction with CME, gave CyrusOne a foothold in financial services.

Knitting together assets from various deals was a complicated undertaking. As a public company, CyrusOne was wrestling with activist investor Jana Partners and leadership turnover.

After longtime CEO Gary Wojtaszek departed in 2020, the company was run by a variety of successors with short tenures. They include Tesh Durvasula, an interim CEO for less than a year; Bruce Duncan, who had no prior data center experience; and David Ferdman, a co-founder who was asked to return to lead the company through the latest ownership transition.

While CyrusOne received interest at various points from about a dozen parties, some prospective investors were discouraged by the management churn. Blackstone evaluated the company but never entered serious discussions, according to people with knowledge of the matter, who asked not to be identified because the talks were confidential. Blackstone declined to comment.

After KKR and GIP swooped in, they took board seats and installed Eric Schwartz as CEO. Schwartz was comfortable maintaining a lower profile than other data center CEOs, industry associates said. And he stuck with decisions that had been made before him, including one to outsource facilities operations at roughly 50 North American data centers to Jones Lang LaSalle Inc.

That move, set in motion by Wojtaszek, divided top executives, according to a person familiar with the matter. Some argued it would help the firm offer a standardized playbook across properties, while others worried it would erode the quality of service, people said. Rivals such as QTS don’t outsource facility operations, other people said.

Wojtaszek didn’t reply to messages seeking comment.

Some would-be tenants opted to take their business elsewhere in part because they weren’t comfortable with CyrusOne having fewer in-house boots on the ground in case of an emergency.

CyrusOne maintains oversight of operations at its data centers while tapping third-party personnel for support, another person said. Other data center companies have such arrangements, too.

Industry executives said the shift showed how CyrusOne was moving further away from its roots as a data center operator to become more of an asset-gathering operation to benefit financial backers.

KKR and GIP’s arrival accelerated changes at CyrusOne. The company focused on building from the ground up — and at scale. It benefited from a push by big technology firms to tap data center landlords for infrastructure and power to train AI models.

But even with the AI boom in full swing, CyrusOne fell behind in market share to more dominant players like QTS in recent years, according to some industry rankings.

Things came to a head at the Aurora data center on Thanksgiving, when a cascade of missteps by workers there collided with the reality that the roughly two-decade-old facility ran on outmoded architecture and didn’t automate critical functions.

A day earlier, onsite staff and contractors switched the data center’s cooling towers, which keep the machines from overheating, to a new operating mode to prepare them for cold weather, according to a confidential report reviewed by Bloomberg. That transition failed to adhere with protocol and higher temperatures overwhelmed the cooling system.

A spokesperson for JLL did not have immediate comment when reached by email.

Initial remediation work only made the problem worse, according to the report. As heat built up, the chips and computers powering critical market functions couldn’t operate.

Industry executives said the incident shows what can happen when data centers use outdated cooling technology and lack both the basic automatic controls for temperature and automation systems that can override human lapses.

Meanwhile, CME didn’t have the ability to keep trading functions up and running seamlessly and opted against initiating a complex disaster recovery plan to shift operations to a secondary data center in the New York area.

The money managers behind CyrusOne remain all-in on the AI boom. KKR recently struck a deal with Compass Datacenters to take a stake in a pool of data centers.

Last year, the firm reached a $50 billion pact with Energy Capital Partners to develop data centers decked out with power sources so they can reduce their reliance on the grid. The duo announced earlier this year that their first project would be a $4 billion data center in Bosque County, Texas, built by CyrusOne and ECP.