It is about seven months since the Nasdaq peaked during which period the technology index has tumbled by about a third. The mainstream US benchmark, S&P 500, didn’t peak until 3 January 2022 but is now about 22% off its high point, well into bear market territory.

It is understandable that investors looking at private equity funds factor in some downside to the last published net asset values (NAVs) when the prices of publicly quoted stocks are falling. However, to my mind, some of the huge discounts on these funds are overdone. I cannot make any exact predictions as to when that might change, but if you are bargain hunting in this bear market, the private equity sector is a good place to look.

Last week, I highlighted the low rating of NB Private Equity Partners (NBPE ). NBPE’s discount is 42%, and its market capitalisation is £629m. There are some smaller and more unusual private equity funds trading on even wider gaps to NAV – LMS Capital (LMS ) and Symphony International (SIHL ), for example.

Then there is Harbourvest (HVPE ), one of the largest funds in the sector with a market value of over £1.7bn, which trades 43% discount below its asset value. Although nearly three quarters (73%) of the portfolio is in North America, HVPE is much more diversified than NBPE. Through commitments to Harbourvest-managed vehicles, it buys stakes in limited partnership funds and holds some 95 direct equity co-investments made alongside its favourite managers.

The current chunky discounts are perhaps a reflection of the difficulties that some of these funds faced during the global financial crisis, although a lot has changed since then. One of the reasons that some private equity funds struggled in 2008 was that they had over-committed themselves.

Private equity funds of funds make legal commitments to invest in limited partnership funds, which tend to operate on 10-year investment cycles. In the early years, the limited partnership funds draw down the money as they make investments. Rather than keep vast sums of cash on hand to fund commitments (which would act as a drag on returns), funds like HVPE try to forecast future cash flows. Most drawdowns are funded from distributions from more mature funds that are nearing the end of their lives and are in harvesting mode.

In the over-exuberance of 2006/2007, some funds ran too close to the wire, ramping up commitments to dangerous levels, and then were hit hard when they could not meet those commitments. I am not expecting a repeat of this in the London-listed private equity sector. Managers have learned their lessons and all these funds now make a point of disclosing how they intend to meet commitments as they fall due. Today, it is common for the funds of funds to have borrowing facilities available. These are rarely used but remain available to fund their commitments if distributions dry up.

The pound has been weak recently and is forecast to fall further. That flatters the valuations of US-heavy funds like NBPE and HVPE. For example, the latter’s NAV per share at 30 April was £37.81 or $47.54. As 61% of the portfolio is based in the US and 82% of the underlying funds are dollar denominated, sterling weakness since then will have added about £1.36 per share to the NAV, even if the underlying dollar valuations may have been under pressure from a falling S&P 500.

Although their many investments are benchmarked to the prices of equivalent listed companies, their valuations won’t necessarily have moved in line with markets. Many of the underlying unquoted businesses will still be growing both revenue and profits, and so there’s no guarantee that the private equity valuations will be hit by as much as equity indices have fallen.

The delays in receiving valuations of the underlying holdings means both HVPE’s and NBPE’s asset values are currently largely based on 31 December 2021 valuations of their unlisted investments: NBPE had 17% of its portfolio based on end-March 2022 values, HVPE nil.

The Covid-related market crash of 2020 was so fleeting that it is not very informative. It is more instructive to look at what happened to HVPE during the 2008 crash. The company listed on Euronext in December 2007 with a share price of $10 per share. It immediately acquired a mature seed portfolio of funds with vintages going back to the mid 1990s – so it was effectively fully invested from the start. Over the six-month period from 31 July 2008 to 31 January 2009, HVPE’s NAV fell by 23.3% while the Nasdaq and S&P 500 fell by 36.5% and 34.8%, respectively.

Neuberger Berman, managers of NBPE, published some insights in May 2020. They looked at the performance of private equity during both the global financial crisis and the bursting of the tech bubble. Between the third quarter of 2007 and fourth quarter of 2009 the peak-to-trough fall in the S&P 500 was 55%, whereas the average US buyout fell by just 28%. For the dotcom bubble, they looked at the period from the start of 2000 to the third quarter of 2004. Peak to trough, the S&P 500 fell by 47% but the average buyout fell by 27%.

The implication is that NBPE and HVPE’s private equity portfolios probably won’t have been hit by as much as the 22% fall in the S&P 500. However, their share prices have fallen by more than 25% this year, and I thought that they were cheap even ahead of this.

All these funds tend to value their investments conservatively and achieve sizeable uplifts when they realise them. I reckon that if you could buy or take control of a whole fund at the current share price and liquidate it over time, you would stand a reasonable chance of more than doubling your money – those are enormous sums going begging. Remember what happened to Electra when Edward Bramson’s Sherborne took it over and extracted huge dividends winding it up!

James Carthew is a director at Marten & Co. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.