In its latest monthly report Winterflood said concerns for the Private Equity sector may have been overcooked.
The sector was hit hard in the third quarter, with share price falls and the majority of funds underperforming the FTSE All Share.
This poor performance came after a first half which saw strong rises in net asset values (NAVs) as a result of underlying earnings growth.
James Brown, research analyst at Winterflood, said of H1: "Across the sector, investment actiity was considerably higher than in the past few years. Discounts, which for many funds started the year around 30%, tightened during the first six months of 2011.
"Consequently, the vast majority of listed private equity funds outperformed the FTSE All Share in first half of the year."
Since June, however, much of that outperformance has been reversed.
Brown said share prices had fallen and discounts had widened, with only one fund, Henderson Private Equity, delivering a positive performance, up 5%, in the third quarter.
The worst performer over the same period was 3i group, which saw its share price fall 33%.
High beta, high risk?
The poor trend over what has been a volatile summer is not surprising as private equity funds are regarded as high beta vehicles, sensitive to a downturn in macrco conditions.
"In addition, the sector is perceived as vulnerable to any crisis in the banking sector, given its traditional reliance on debt," Brown continued.
Post-Lehman Brothers, the Private Equity sector was hit particularly hard, with the sectors relative outperformance over the FTSE All Share from the previous 10 years completely wiped out.
But Winterfloods said this time round market uncertainty was likely to be more manageable, as levels of gearing and outstanding commitments are considerably lower than at the comparable stage in 2008.
"Earnings will no doubt be hit by some of the underlying holdings. However, underlying debt levels in general are much lower than three years ago. Year-end valuations are likely to be down, but we believe that this is largely in the price," said Brown.
One Winterflood recommendation for a play on the sector is Electra Private Equity, currently trading at a 46% discount, which has benefited from two substantial disposals recently.
Another is Standard Life European Private Equity, also on a 46% discount, which Brown said offers diversified exposure to European private equity funds.
