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

The bitcoin miners’ need for enormous amounts of energy isn’t a secret – in fact, it’s a hotly debated topic. With the rapid rise of the AI sector, the thirst for power by AI-related firms isn’t far off either. There are reports of the industry already using as much energy as a small country and could ramp up even more. This surge is creating a problem for the AI industry: investors are pouring money into the sector, but firms don’t have immediate access to infrastructure to feed the ever-growing computing needs.

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

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

“One of the biggest constraints [for data centers] right now is finding sites that have over 100 megawatts of power and have the high voltage substation’s transformer in place. Those are difficult sites to find, and it just so happens that’s been the criteria for locating bitcoin mining sites for the past four years,” Sullivan said.

Core Scientific recently inked a 12-year, 200 megawatt (MW) deal with cloud computing firm CoreWeave for AI-related computing needs, with options to expand the capacity further.

Sullivan noted that since the news broke about the deal, Core Scientific has received several approaches from tier-one private equity firms offering financing for further AI-related partnerships. In fact, the deal has triggered a re-rating of the bitcoin mining sector as it renewed investors’ interest in the sector. JPMorgan even went one step further and said that the deal validates the mining sector’s involvement in high-performance computing (HPC) and may usher in a new age of mergers and acquisitions for the miners.

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

“The halving has also caught the attention of private equity firms, which see this event as an opportunity to consolidate smaller firms and fold 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 done “exceptionally well” since the halving.

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

“Many 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 at ways that they can grab economic value out of some of these potential conversions [from mining to HCP],” noted Sullivan. In many cases these PE firms can provide a significant amount of assistance to some of the more “under-qualified” miners, including bringing in a new partner or introductions to new potential customers, he added.

Another reason PE firms are circling the mining sector now, after ignoring it for several years, is that previously, “value was too volatile for their return profile.” Longer-duration HPC deals, such as the 12-year contract Core Scientific signed, 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 return. Will this mean the end of the bitcoin miners?

The answer is not that simple, according to Sullivan.

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

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

However, before miners can make it to the next halving, they must survive the one that just happened this year. The overcrowded mining space is now feeling pressure from the margin squeeze, resulting in a flurry of acquisitions and renewed deal-making talks among the miners.

In fact, Core Scientific rejected a $5.75 per share takeover offer from CoreWeave the same day it signed the 200MW deal, saying it significantly undervalued the firm. When asked about the deal’s status, Sullivan said both companies are now focused on organic growth opportunities. At the same time, Core Scientific is aggressively pursuing new sites and is talking to new potential clients.

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

The recent wave of M&A activity also saw a hostile takeover battle between Riot Platforms (RIOT) and Bitfarms, CleanSpark (CLSK) buying GRIID (GRDI) and Hut 8 getting AI-related financing, and this is just the beginning.

“I think we’re still in the early innings of the M&A that’s going to occur over the course of the next 12 months,” said Sullivan.

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