New name, new business, new shareholder

SGT German Private Equity 20 October 2020 Update
Download PDF German PDF Download

SGT German Private Equity

New name, new business, new shareholder

Financials

Scale research report - Update

20 October 2020

Price

€1.75

Market cap

€19m

Share price graph

Share details

Code

SGF

Listing

Deutsche Börse Scale

Shares in issue

10.9m

Last reported net cash including short-term financial assets at end-H120

€7.3m

Business description

Frankfurt-based SGT German Private Equity was renamed after the merger with SGT Capital and will become a listed private equity asset manager. The company will manage a PE fund, currently in fundraising phase. SGT also manages a VC portfolio of minority stakes in non-listed German companies, predominantly in the technology sector.

Bull

Potential success of new business model may result in value creation.

Secular growth trend of the private equity industry.

SGT’s share value, implied by the compensation for the contribution in kind, is well ahead of the current share price.

Bear

Level of capital raised for the new fund is uncertain at present.

Limited visibility on the asset making up the contribution in kind.

The merger will result in share dilution, up to 93% on successful launch of the PE fund.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

SGT German Private Equity (SGT, formerly German Startups Group, GSG) reported a minor €0.2m net loss in H120, following the deconsolidation of Exozet in FY19. The company is currently in a merger process with a private equity asset manager SGT Capital. Meanwhile, as at end-June 2020, SGT’s main operations covered a portfolio of 22 minority stakes in non-listed entities, which is expected to gradually wind down. Recently SGT announced the disposal of its Fiagon stake at a 2.0x exit multiple.

Rebranding following merger

On 7 August 2020, GSG’s AGM approved the merger with SGT Capital as discussed in detail in our previous update note. The company was renamed SGT German Private Equity, its headquarters moved to Frankfurt from Berlin and its Deutsche Börse ticker has changed to SGF from GSJ. The new business model will be focused on managing third-party assets through a private equity fund that is currently raising funds.

Deconsolidation of Exozet

Following the disposal of Exozet in late 2019, SGT deconsolidated its Creative Technologies operating segment. At the same time, SGT did not recognise any management fees from the private equity fund, as these will be generated upon successful completion of the fund-raising and start of the fund’s investment period. Meanwhile, financial results in H120 were still driven by SGT’s venture capital portfolio, with the result from SGT’s investment business flat year-on-year at €0.7m in H120.

Valuation: On the brink of merger

As at 19 October 2020, SGT trades at 36% discount to its end-June 2020 NAV, which is broadly in line with the levels seen in previous years. We believe that once the new business model is implemented, the company may be valued by the market based on prospective earnings rather than through the discount/premium to NAV. We note that the ongoing merger will result in significant dilution of current shareholders (up to 93%), but the NAV may be supported by the contribution in kind from SGT Capital. We understand that for the purpose of the merger the contribution has been valued by an independent firm based exclusively on the prospective fee income of the new fund, which is still in a fund-raising phase. Having said that, the above valuation implies a value of newly issued SGT shares at €2.92 in the base case and €4.04 in the best-case scenario.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

10.9

(5.4)

(0.29)

0.0

N/A

N/A

12/17

9.6

1.8

0.14

0.0

12.9

N/A

12/18

12.5

1.2

(0.05)

0.0

N/A

N/A

12/19

16.4

3.7

0.26

0.0

6.7

N/A

Source: SGT German Private Equity, Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Focus on the investment business in H120

SGT’s net loss in H120 amounted to €0.2m vs a €0.2m net profit in H119. H120 is the first financial period after deconsolidation of the majority-owned digital agency Exozet, sold back in December 2019 (which we describe in detail in our June 2020 note), which greatly affected SGT’s results. Consequently, SGT became a pure investment company, except for the minor operations of the online matchmaking platform of German Startups Market.

SGT’s result from investment business was flat year-on-year at €0.7m due to more limited revaluation gains and losses than in the previous year. Upward revaluations (both realised and unrealised) amounted to €1.0m and were 35% lower year-on-year and similarly SGT’s losses on revaluations were 63% lower at €0.3m. Net operating expenses decreased greatly to €0.8m from €7.6m in H119 as they were mostly related to Exozet’s operating business. Most notably, personnel expenses amounted to €0.1m in H120 compared to €4.4m in H119. As a result, EBIT amounted to a loss of €0.1m vs the H119 EBIT profit of €1.0m, with EBIT attributable to the investment business in H119 at €0.1m. The slightly higher net operating expenses excluding the Creative Technologies segment are likely related to legal and operational costs of the merger.

As at end-H120, GSG VC (now a subsidiary of SGT) held a portfolio consisting of 22 investments, of which eight are key holdings representing 88% of the portfolio value (of which one was subject to upward revaluation in H120). GSG VC performed two smaller partial exits in H120 from German Crypto Tech and Alphapet, and a full exit of Fiagon post-reporting date (September 2020). Fiagon is a med-tech company in which GSG VC held a 2.5% stake, acquired by Nasdaq-listed Intersect ENT. The uplift on disposal will be recognised in H220 results at €0.4m over the carrying value. Overall, SGT will receive over €2.3m proceeds over three years and should achieve a 2.0x exit multiple, translating into an internal rate of return of 24% pa. SGT also performed a follow-on investment in AuctionTech.

As at end-H120 SGT is virtually debt-free with a net cash position of €0.3m. SGT also holds €7m in short-term financial assets, which consist mostly of receivables from the sale of shares and short-term securities. Including these as near cash items, the net cash position increases to 25% of equity capital.

Exhibit 1: Results highlights

€000s, unless otherwise stated

H120

H119

y-o-y

Profits from financial assets valued at fair value with recognition in profit or loss

953

1,470

-35%

Losses from financial assets valued at fair value with recognition in profit or loss

(299)

(818)

-63%

Result from investment business

654

653

0%

Revenues

59

7,272

-99%

Change in inventories

-

447

N/A

Income from own work capitalised

-

233

N/A

Other operating income

89

168

-47%

Cost of materials and services received

-

(1,670)

N/A

Personnel expenses

(58)

(4,372)

-99%

D&A

(4)

(491)

-99%

Other operating expenses

(807)

(1,244)

-35%

Incidental acquisition costs of investments

(12)

(10)

20%

Result from other components

(733)

333

N/A

EBIT

(79)

985

N/A

o/w Investments

(79)

59

N/A

o/w Creative Technologies

-

926

N/A

Financial income

317

15

N/A

Financial expense

(518)

(281)

84%

Net financial income

(201)

(266)

-24%

EBT

(280)

719

N/A

Income taxes

113

(274)

N/A

Minorities adjustment

-

(260)

N/A

Net profit (ex-minorities)

(167)

184

N/A

EPS, basic (€)

(0.02)

0.02

N/A

Source: SGT accounts

Merger to create a listed PE asset manager in progress

As described in detail in our report in July 2020, SGT (previously GSG) will merge with private equity asset manager SGT Capital Pte Ltd, which serves SGT Capital as a backdoor listing. SGT Capital LLC, the parent company of SGT Capital Pte Ltd, will become a majority shareholder of the listed SGT. Depending on the final terms of the convertible bond conversion, SGT Capital LLC’s stake in SGT may be up to 93.4%. The new entity will maintain the legal form of a partnership limited by shares (KGaA), still managed by German Startups Group Management (to be renamed SGT German PE Management); see full organisational chart in Exhibit 2. The general partner was fully owned by GSG’s CEO Christoph Gerlinger, who will retain a 25% holding in the entity and will remain managing director of the renamed entity. The general partner is entitled to a profit advance of 25% from the amount of earnings exceeding commercial losses, which would amount to €0.9m if all the assets were sold at end-H120 balance sheet value. This translates to €0.08 per share and compares to €0.09 per share at end-FY19. Having said that, the general partner has recently waived its right to receive this fee.

SGT maintains its VC operations under the new entity, with its portfolio of minority stakes in German start-ups and its secondary shares trading platform G|S Market managed by GSG VC. The entity remains fully owned by SGT. The acquired SGT Capital Pte Ltd will manage the SGT Capital Fund II (a private equity fund with a primary focus on Europe and North America), which is currently in the process of raising capital with the target volume of US$1.0–3.5bn. SGT announced back in July 2020 it had US$411m commitments already secured prior to merger. As the merger was not finalised yet, and operations of GSAM are still marginal, SGT financial results were almost solely attributable to GSG VC (as discussed above).

Exhibit 2: Organisational and ownership structure of newly formed SGT German Private Equity

Source: SGT

Valuation

SGT’s NAV was €29.8m at end-H120, or €2.75 per share (based on share count excluding treasury shares, according to our estimate). This translates to a 36% discount based on the current share price of €1.75. On 13 October 2020 SGT completed a share buyback covering 542,700 shares at a price of €2.0 per share. The discount has recently remained at a similar levels to prior years despite the significant organisational changes.

In this context, we note that the merger will result in considerable dilution of the existing shareholders. GSG acquires SGT Capital Pte Ltd against the issuance of 50m new GSG shares, compared to the currently outstanding 10.9m. Additionally, the convertible bond issue will result in issuance of further up to 103m shares, which means current shareholders will be diluted up to 93%. We acknowledge that the merged entity will be significantly larger than GSG itself, which may offset the dilutive impact of the GSG share issue. Moreover, the independent valuation prepared by Ebner Stolz for the purpose of the merger implies a value per newly issued GSG share of the new entity at €2.92 and €4.04 in the base case and best case scenarios, respectively (significantly above the current NAV and share price). However, there is still limited visibility on the potential success of the new strategy, given that the fund-raising process of SGT Capital Fund II is still in progress.

Upon successful fund-raising, SGT could be, to some extent, comparable with other listed private equity asset managers, such as KKR, Blackstone, EQT or Partners Group (bearing in mind that these are much larger, well-established players). These currently trade at next 12 months P/E ratios in the range of around 19.2–38.0x (based on Refinitiv consensus), which may however be distorted by the impact of COVID-19.

We also note that, as described in the financial section, within SGT’s organisational structure, the general partner is still entitled to a preferential profit advance. The current majority shareholder of SGT is also the majority shareholder of SGT’s general partner.

General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues