While Australia may lament the lack of direct exposure to artificial intelligence (AI) locally, dealmakers are flagging peripheral investment opportunities, deploying capital to the so-called “picks and shovels” businesses in the AI infrastructure and data centre gold rush.

Australia, unlike the US and China, has yet to produce world-leading frontier AI models or chipmakers. However, there is no lack of businesses that provide critical services to data centres, the digital infrastructure that underpins AI models.

Just like Prime Group, a family owned electrical contractor, which recently secured AUD 20m (USD 14m) investment from Melbourne-based private equity firm Nash Capital. According to Nash Capital’s announcement, Prime Group is a major provider of electrical and cabling services to Australia’s expanding data centre industry, working with the likes of Microsoft, Amazon and Vantage.

For Nash Capital, Prime Group marks its second investment tied to the growing data centre industry, following its 2021 investment in Evolution Precast Solutions, a supplier of precast concrete components to major data centre operators including AirTrunk, CDC, and Goodman Group.

Both investments reflect Nash Capital’s playbook that “so-called ‘boring’ businesses in essential industries can produce compelling private equity returns when backed by active ownership and disciplined execution,” if applied to the least boring tailwind in the market, the firm noted.

“Our fund structure doesn’t allow us to buy Nvidia or OpenAI, nor would we want to pay those kinds of valuation multiples. We can see the trend in data centres in Australia, but how do we invest in that thesis in Australia at attractive valuations?” Nash Capital managing director Sean O’Neill told Mergermarket.

“We are looking up and down in the supply chain to see who is supplying these data center operators and also forming a view of how long this data centre build out will take.”

Australia was already the second largest investment destination for data centres globally in 2024 with USD 6.7bn in capital investment, trailing only the US, according to Westpac’s report titled Powering the AI economy published in May. Based on Westpac’s estimate, Australia’s data centre investment pipeline will exceed AUD 155bn by 2035.

In a gold rush, sell shovels, as Minack Advisors’ Gerard Minack suggested. “Not many people selling AI services are making any money from it. The people that are making the money are shovel sellers,” he told this year’s Morgan Stanley Summit last month in Sydney.

Spot the winner

‘Picks-and-shovels’ businesses may not sound as glamorous as chipmakers and neo-clouds. In fact, they are often unglamorous: electrical contractors, switchgear makers, cable-system providers, and the like. But they provide the lifeblood for the sophisticated data centres where AI models run, according to industry investors and advisers.

For example, a private business that distributes fire protectors to data centres has received eight approaches from PE investors recently, according to a corporate advisor who spoke with the business owner.

Mark Rafferty, CEO of Australian dark fibre infrastructure provider FibreconX, said the company began building its Sydney network in 2019 when the city had around 22 data centres, but now services about 38 facilities and expects the market to grow beyond 50 over time.

The company, backed by Australian mining billionaire Andrew Forrest’s investment company Tattarang, may seek a strategic capital partner to support continued network expansion and maintain its first mover advantage in the data centre connectivity market, Rafferty told this news service recently.

There is also huge interest in water operation assets, including water recycling and desalination assets, as the data centre boom will lead to an increase in water use, an international investor with significant investments in Australia told Mergermarket.

The investor said that his firm is actively seeking such opportunities in the water infrastructure and treatment space, flagging some are coming to the market driven by increased demand.

Size matters

Suppliers to the data centre market need to be a certain size, according to Nash’s O’Neill. Using electrical contractor as an example, “if you have 50 staff as an electrical contractor, that’s probably too small to service the jobs. Data centre operators are looking for tier-1 players that have at least 250+ staff,” he said. “Size is more important in this space.”

The trade skilled services supplying to data centers are still quite fragmented, so consolidation is inevitable, the international investor said. Bolt-on acquisitions in these industries have been flourishing, led by some highly acquisitive ASX-listed companies, he pointed out.

Southern Cross Electrical Engineering, which recently secured electrical and communications work for NEXTDC’s data centre project, is actively exploring a range of acquisitions, managing director Graeme Dunn said in a company update last month.

Following a AUD 150m placement and additional debt facilities, Southern Cross now has pro forma liquidity of approximately AUD 308.8m to support future growth including acquisitions, as announced.

Another active acquirer is provider of specialised trade skilled services Tasmea, which has made seven acquisitions since it listed on the ASX in 2024, according to Mergermarket data.

The largest among these was the AUD 254m acquisition of electrical contractor Maxim Group, which has significant exposure to Australia’s data centre market.

Traditional players’ pivot

What is noticeable in this gold rush is that companies traditionally servicing resources, renewables and construction sectors are pivoting to AI and data centres for a slice of the growing pie, according to the corporate advisor.

“The avenue they are accessing that exposure is usually through acquisitions,” he said, pointing to Tasmea as a typical example.

NRW, a leading provider of diversified contract services to the resources and infrastructure sectors, also entered the data centre market through its AUD 200m acquisition of Fredon late last year. Fredon is a national provider of electrical, mechanical, infrastructure, technology and maintenance services, including providing both electrical and HVAC services to major data centres.

Maas Group, which started in construction, went even further in the pivot by divesting its construction materials division for AUD 1.7bn earlier this year and making a strategic minority equity investment in Australian developer of AI infrastructure Firmus.

As local media flagged earlier this year, Maas may also need to pursue strategic acquisitions to fulfil its desire to capture electrical work connected to AI and data centres.

The rapid expansion of data centres is also creating unexpected tailwind for companies not directly exposed, according to Mike Wishart, founder and CEO of EcoJoule Energy, a private designer and manufacturer of Australian-made power management systems backed by Ellerston Capital.

With large manufacturers prioritising data centre projects, the electrical equipment space will see a “world-wide supply shortage”, creating opportunities for specialist providers such as EcoJoule. “The power is shifting to the supply side, where suppliers just have absolutely full order books,” Wishart said.