Cambridge Associates reckons family offices should continue to seek deals, seeing climate tech as a good choice

It was all too easy. Elisabeth Lind of Cambridge Associates is philosophical over this year’s downturn in venture capital. “When you look back, I don’t think anyone was all that surprised. A good idea is only a good idea – it’s not a company with massive potential, which deserves infinite funding.”

But Lind argues that family offices should take advantage of current funding terms to snap up new opportunities where they can. In her view, deep tech deserves a close look, along with government-aligned deals to counter climate change in sectors like nuclear fusion. 

Just because the market has dropped, this does not mean that technological innovation is grinding to a halt. On the contrary, you may need to invest to stay relevant.

Lind is managing director at Cambridge’s private client practice. She says she has warned of stretched valuations and never-ending funding assumptions for some while. 

The sector has seen a 50% downturn in transactions against their peak. Corporate deals in the secondary market can be priced 40% to 60% below their prior funding valuation. Cambridge does not recommend investors use the secondary market unless they need to do so, but it can be an interesting route to top up a portfolio.

Cambridge is advising family offices with allocations to venture capital to stay the course where they retain sufficient liquidity to do so. 

For some years, it has taken the view that private assets should account for 40% of portfolios to achieve outperformance.  Lind has seen the proportions as high as 55%. Interest in private assets, protecting investors against market volatility, is growing.

Lind warns investors need to reset their expectations after enjoying fund distributions on which they could never hope to rely in perpetuity.

The sector has seen occasional fundraisings at a discount, as with fintech Klarna, now 85% below its previous valuation: “But we haven’t seen many down rounds yet. Corporate founders are more focused on layoffs and debt markets.” 

Further big losses from down rounds will always be possible, but Lind says Cambridge has avoided this, to date. It declined to release data on its performance, however.

Lind says it is perfectly natural for a family office principal with a corporate background to gravitate towards venture capital. The long-term track record helps.

But if they are expecting a big drop in fund fees, they may be disappointed: “It took ten years of underperformance for hedge funds to start adjusting their fees.” Direct investing, she adds, requires family offices to tool up.

She is encouraged by recent trends in deal negotiations: “Founders are walking back a bit, offering more friendly terms. We get more time to analyse situations, rather than having to join a queue.”

“Co-investing is absolutely still there. You see it more on the buyout stage, but for late-stage venture capital as well.”

She enjoys nothing more than advising on opportunities which are difficult to execute. Today’s situations tend to be complex, but these are the solutions that society badly needs.

“It’s the tough science – the deep tech – that can move the needle and align with what governments are trying to achieve.” 

Lind’s favourite sectors include healthcare and advanced AI. Action on climate change is also a top priority now that most governments have gotten involved. She says the sector can generate high financial and social returns for investors.

Climate tech deals totalled $44.8 billion in 2021, double the 2020 total, according to Pitchbook. Sums edged down in the first quarter, but impact investing is gaining in strength as investors pull away from market-based ESG funds.

Lind says: “There are very smart people working on some very, very, important big projects. I’m seeing  themes which can appeal to my clients, where they can invest at scale on a direct basis, with governments increasingly involved.”

She is keen on nuclear fusion, where family offices often invest direct. Bill Gates, through Cascade Investment, and LG of South Korea have just raised $750 million for TerraPower’s innovative nuclear projects.

The Singapore government has backed desalination: “A lot of interesting technology is coming out of there. You can also see it in China in terms of where they are focused.”

Dried-up riverbeds and water restrictions are causing concern across the world. California is facing fire issues and difficulties in finding home insurance. This can only accelerate the search for solutions, says Lind. 

She has also witnessed a change in the attitude of company founders, who are increasingly generating social and environmental returns. In fact, to hire quality talent, they probably have no choice.