The context of this is that further downward revaluations could mean the present share prices could fall much further, and cause the discounts to widen even more.
Brierley says it is difficult to generalise across the sector in terms of whether the present share prices of the trusts reflect any coming write-downs in the value of the investments. He notes for some trusts “the impacts of the write-downs is still to come”.
Iain Scouller, managing director for investment funds at Stifel, says that even if widespread write-downs are to come, the bad news may be reflected.
He says: “While we continue to expect some 'haircuts' to valuations at the important December 31 2022 valuation point, we think current discount levels are implying NAV write-downs of 20 per cent to 30 per cent.
"We think this is excessive given earnings at many underlying companies continue to be relatively robust and many balance sheets remain strong. Catalysts for a re-rating of the listed private equity sector could include a significant positive re-rating of smaller and mid-cap listed companies, possibly once markets can see beyond rising interest rates.
"Another factor that would re-rate the sector is the emergence of corporate activity. At current valuations, we take a positive view on the sector and see significant scope for a re-rating.”
Leatham notes: “When we look at the NAV data reported so far this year, we are seeing more resilience across the private equity portfolios than the market is giving them credit for.
"Based on our analysis of share price performance versus lagged NAV’s (to take account of the delayed reporting), there have been six clear instances of discount 'overshoot' for private equity fund of funds over the past 15 years and this is one of them.
"Our pick in the sector is HarbourVest Global Private Equity, which has delivered 23 per cent annualised NAV total return over the past five years and is trading on 45 per cent discount to end September 2022 NAV."
Leatham adds: “If we look at valuations going into 2022, the aggregate underlying portfolio valuations (using EV/EBITDA multiples) across the private equity fund of funds were undemanding, particularly in comparison to the S&P 500.
"In our experience, funds are typically conservative with their valuation adjustments on the way up, which is why we have seen such attractive uplifts to carrying values on realisations. This also suggests that the valuation correction might not be as bad as listed equity markets might imply.”
