Cambridge Associates throws caution flag on large U.S. buyouts

  • Large buyouts “less compelling” for LPs like San Francisco
  • Healthcare-linked venture, distressed-for-control more attractive
  • San Francisco committed $1.1 bln to PE last year

Cambridge Associates is advising San Francisco Employees’ Retirement System to be very selective in allocating to new U.S. buyout funds, according to a presentation the retirement system released.

“As interest rates rise, tighter credit markets could inhibit exits/new investment activity and increase financing costs for existing portfolio companies,” Cambridge wrote in its report. “Investors should monitor the pace of their managers’ capital deployment.”

Last year, San Francisco committed roughly $1.1 billion across 18 private equity firms. GPs called $744 million from the pension and returned $520 million in distributions.

In its report, Cambridge noted that deal flow slowed in 2016, with U.S. buyout funds deploying $136.5 billion of investment capital, down 14 percent from $159 billion the year earlier. In January, firms completed deals valued at $7.8 billion.

The firm grouped large and mega- U.S. buyout strategies among the “less compelling” strategies in the current climate, according to the report. Large and mega-European buyouts, late- and expansion-stage U.S. venture, large European buyouts, tradeable distressed and secondaries strategies were also considered less attractive.

Cambridge considered U.S. healthcare-oriented venture strategies and distressed-for-control funds more compelling.

“Most PE markets remain frothy. SFERS continues to focus on high-conviction opportunities, emphasizing manager selection and prioritizing pockets of relative value and attractiveness,” according to the report.

Cambridge Associates was unavailable for comment.

The bulk of San Francisco’s $2.9 billion PE portfolio is in developed-market buyout (36.4 percent) and VC strategies (34.2 percent). The remaining 30 percent is allocated across a variety of emerging-market, growth and special-situations investments.

San Francisco had a 14 percent allocation to PE, 4 percentage points short of its 18 percent target, Cambridge said. The portfolio has netted a 15.7 percent IRR since inception, exceeding the S&P 500 by nearly 8 percentage points.

Action Item: For more information about Cambridge Associates, visit