Private equity (PE) firms are finally seeing value in bitcoin (BTC) miners, thanks to the growing demand for data centers that can power machines related to artificial intelligence (AI).

Bitcoin miners’ need for massive amounts of energy is no secret – in fact, it’s a much debated topic. With the rapid rise of the AI ​​sector, the thirst for power by AI-related companies is also not far away. There are reports from the industry already using as much energy as a small country and could grow even more. This growth is creating a problem for the AI ​​industry: Investors are pouring money into the sector, but companies don’t have ready access to the infrastructure to power the growing computing needs.

This is where bitcoin miners and their data centers are becoming a lucrative option for investors, Adam Sullivan, CEO of one of the largest mining companies, Core Scientific (CORZ), told CoinDesk in an exclusive interview.

“Private equity is obviously chasing the data center space now; even private equity firms that haven’t necessarily done data centers before are evaluating the space,” Sullivan said. These PE firms ultimately see value in bitcoin miners as they can help AI-related companies house their machines in already-built mining infrastructure or partner with miners to build data centers faster than building from scratch.

“One of the biggest constraints [for data centers] “Right now it’s finding sites that have over 100 megawatts of power and have the high-voltage substation transformer in place. Those are hard-to-find sites, and it turns out that’s been the criteria for finding bitcoin mining sites for the last four years,” Sullivan said.

Core Scientific recently signed a 12-year, 200 megawatt (MW) contract business with cloud computing company CoreWeave for AI-related computing needs, with options to further expand capacity.

Sullivan noted that since news of the deal broke, Core Scientific has received several approaches from top-tier private equity firms offering funding for more AI-related partnerships. In fact, the deal has sparked a reclassification of the bitcoin mining industry as it renewed investor interest in the sector. JPMorgan went further and said the deal validates the mining industry’s involvement in high-performance computing (HPC) and could usher in a new era of mergers and acquisitions for miners.

One of the main reasons private equity is interested in the mining sector right now is the recent Bitcoin halving, which cut Bitcoin rewards in half, making it more competitive for miners. Many miners are struggling to keep their businesses profitable, and some are looking to sell their businesses or diversify their revenue streams by repurposing their data centers to host HCP and AI-related computing machines.

“The halving has also caught the attention of private equity firms, who see this event as an opportunity to consolidate smaller companies and incorporate their existing infrastructure into their own,” the firm said in a note dated July 2, adding that some mining stocks including Hut 8 (HUT) and Bitfarms (BITF) have performed “exceptionally well” since the halving.

However, the amount of capital required to build or repurpose data center clusters to accommodate AI computing is not cheap. In such a competitive market, it is becoming prohibitively expensive for some miners to do so and private equity is now seeing an opportunity to help these miners by providing financing and other expertise, said Core Scientific CEO.

“A lot of these Bitcoin mining companies are struggling right now to build their Bitcoin mining facilities, and these private equity firms are looking at potential returns, looking for ways to get economic value out of some of these potential conversions. [from mining to HCP]Sullivan noted. In many cases, these PE firms can provide a significant amount of assistance to some of the more “underqualified” miners, including bringing in a new partner or introductions to new potential clients, he added.

Another reason PE firms are circling the mining sector now, after ignoring it for several years, is that previously, “the value was too volatile for its return profile.” Long-duration HPC deals, such as the 12-year deal signed by Core Scientific, are “much more viable and investable for private equity firms,” Sullivan added.

The business model for private equity is own-to-sell: buy a business or asset, tweak or completely change the business model, and then sell the company to maximize returns. Will this mean the end of bitcoin miners?

The answer is not so simple, according to Sullivan.

First, this would be part of a broader shift for some sections of the mining business. The upcoming halving will continue to make the industry more competitive, pushing for lower-cost mining sites, which are likely to see the most interest from HCP and PE companies.

Second, not all mining sites in use today can be converted into data centers. A number of variables may make some sites unsuitable for HPC conversion, and he added that these will remain mining sites as long as it is economically viable for them to remain in the mining business.

However, before miners can make it to the next halving, they must survive what happened this year. The overcrowded mining space is now feeling the pressure of the margin squeeze, resulting in a wave of acquisitions and renewed deal negotiations among miners.

In fact, Core Scientific rejected a $5.75-per-share takeover offer for CoreWeave on the same day it signed the 200 MW deal, saying it significantly undervalued the company. When asked about the status of the deal, Sullivan said both companies are now focused on organic growth opportunities. At the same time, Core Scientific is aggressively pursuing new sites and is in talks with potential new customers.

Still, unsurprisingly, the CEO of the public mining company said that if a potential suitor is willing to pay what the shareholders and board consider to be full value for the company, the company will have to consider the offer. Despite the outright rejection of the offer, Sullivan thinks M&A is just getting started in the mining space.

The recent wave of M&A activity has also seen a hostile takeover battle between Riot Platforms (RIOT) and Bitfarms, CleanSpark (CLSK) buying GRIID (GRDI), and Hut 8 securing AI-related funding, and that’s just the beginning.

“I think we’re still at the beginning of the merger and acquisition that will occur over the next 12 months,” Sullivan said.

“I believe many companies are much more incentivized to sell their businesses to other larger companies given infrastructure constraints, or look to convert more of their facilities to HPC,” he noted, adding that most “mid-market” miners are likely to put themselves up for sale.

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