Rapid start to DBAG Fund VII’s investment period

In FY17 to date, DBAG has completed the investments in Polytech Health and Frimo as well as the divestment of Broetje-Automation that were all announced in H216, with three further new investments and two divestments announced (see Exhibit 2). In total, these transactions bring FY17 new investment to c €63m, more than five months ahead of the financial year end.

Having generated proceeds of €82m from the sale of its investment in Homag, which represented 36% of DBAG’s portfolio at end-July 2014, DBAG achieved a significant step-up in the pace of investment activity during FY15, as illustrated in Exhibit 3. Total new investment for the 11-month financial year to 30 September 2015 reached €71.4m, ahead of the target €50m pa run rate and the €20.6m average for the prior 10 years. Seven new companies were added to the portfolio in FY15, comprising five MBO and two expansion capital investments, all in DBAG’s core manufacturing and industrial services sectors, with two small divestments completed, resulting in an increase in the number of portfolio holdings from 19 to 24.

DBAG continued the strong pace of investment activity throughout FY16, agreeing investments in five new portfolio companies – three MBOs through DBAG Fund VI and two co-investments alongside DBAG ECF – as well as three divestments. New investment for the financial year totalled €32.6m, with two of these transactions (€27.2m) and a follow-on investment (c €1.9m), as well as one of the divestments, being completed after the year end.

In January 2017, DBAG invested €5.9m, alongside DBAG Fund VI, taking a 13.1% interest in Dieter Braun, in the management buyout of the business from financial investor Seafort Advisors. Braun is a specialist cable assembly and lighting supplier to the automotive industry, providing solutions involving a high degree of complexity and variable lead times. Founded in 1993 and headquartered in Bayreuth, Germany, Braun operates facilities in the Czech Republic, Ukraine, Mexico and China. Revenues have grown at 19% pa over the past seven years to €77m and it employs 1,500 staff.

Braun is benefiting from an increasing volume of electrical and electronic components in vehicles as well as the trend by OEMs and suppliers to outsource production processes. DBAG’s investment will support Braun’s capacity expansion and development of new production lines to meet growing demand and strengthen the company’s position in a fragmented market. In addition, there is potential to expand Braun’s product portfolio as well as broadening its geographical reach.

This acquisition represented the 11th investment by DBAG Fund VI, bringing its investment period to an end after less than four years – a year ahead of the fund’s scheduled investment period end in February 2018. With the fund 86% invested, remaining commitments will be available to support the growth of portfolio companies, including potential add-on acquisitions.

In March 2017, DBAG announced an investment in two radiology practices in the state of North Rhine-Westphalia, Germany, which will be merged to form a group. DBAG will invest €15m for an 11% stake in the group as part of the c 55% stake being taken by DBAG Fund VII through the management buyout, which represents its first investment. The interests held by 18 physicians who have managed and developed the two group practices are being acquired, with all reinvesting to hold a combined 44% stake in the group. The transaction is expected to complete by mid-2017, following regulatory approvals.

The radiology practices (www.radiologieherne.de, www.ranova.de) have provided outpatient and inpatient care for over 40 years, offering a complete range of radiological and nuclear medical examinations, therapy and interventions, acting as partners to private practices as well as hospitals. They operate at 15 locations, staffed by 87 physicians, and generated €54m total revenues in 2016.

DBAG’s investment will help finance ongoing development. Combining the practices and increasing the scale of the group is seen as an effective way to develop these capital-intensive medical services. Collectively, the practices can maintain high standards of quality, while providing their services cost-effectively due to their structure and size. Further organic development and acquisitions of other practices are planned as well as additional cooperative projects with hospitals.

In April 2017, DBAG announced the management buyouts of family-owned businesses Abbelen and Oscar Mayer, aiming to establish a European market leader for chilled convenience products, primarily fresh ready meals and snacks. DBAG is investing €15m for a 16% stake as part of an €80m investment by DBAG Fund VII, which will hold an overall c 90% stake. The acquisitions are being made via a holding company, managed by Helmut Morent and Francois Legrain, who have extensive experience in the sector and jointly sourced the two transactions with DBAG. These two managers and group company senior executives will hold the remaining shares in the group.

Abbelen and Oscar Mayer will continue to be run autonomously, but will operate under the umbrella of the holding company, with the objective to expand the companies’ product ranges and broaden the group’s international distribution. The holding company will target add-on acquisitions, aiming to bring group revenues to more than €500m. DBAG Fund VII’s top-up fund will be used to finance add-on acquisitions, enabling equity capital investments of up to €200m for a single transaction.

Abbelen is the largest private-label manufacturer of meatballs and ready-made burgers in Germany, with revenues of €140m. From its meat processing factory in Tönisvorst (North Rhine-Westphalia), it supplies all of the large supermarket and discounter chains in Germany and bordering countries. Oscar Mayer is the leading producer of chilled prepared meals in the UK, which are sold under private labels of leading grocery retailers and discounters. The company operates four sites in England and Wales with a staff of c 2,650 and produces more than three million chilled prepared meals and snacks a week, generating revenues of £253m (c €293m) in its 2015/16 financial year.

In November 2016, DBAG agreed the sale of Grohmann Engineering, a developer and manufacturer of plants for industrial automation, to strategic buyer Tesla Motors, after almost 30 years as a portfolio holding. DBAG management confirmed that sale proceeds of c €10m were above its most recent portfolio valuation, with the exit generating a mid-single digit positive value contribution.

DBAG’s investment in Grohmann Engineering dates from a growth financing by a predecessor company, which took a 25.1% stake in January 1987. DBAG assumed the entire interest in 1996, with no parallel investment by a DBAG managed fund. Over 20 years, Grohmann Engineering grew its revenues by over 6% pa to €123m in 2015, while employee numbers tripled to c 700. As well as DBAG’s 25.1% holding, Tesla acquired the 74.9% interest held by Klaus Grohmann, who founded the company in 1984.

In March 2017, alongside DBAG Fund V and the company’s management, DBAG sold its holding in FDG Group, a supplier of non-food products to supermarkets primarily located in France, to the private equity arm of French banking group Crédit Mutuel-CIC. Financial terms have not been disclosed but DBAG management has confirmed that sales proceeds equate to more than twice the original investment and are in line with its most recent portfolio valuation.

DBAG acquired the FDG Group in June 2010 from its founding families, in collaboration with Quartus, its partner in the French market. Since 2010, with the objective to broaden its product range, FDG Group has grown organically and through the acquisition of two smaller companies, with net sales rising from €111m to c €123m in 2016, in the face of lacklustre economic growth in France. Efficiency gains were also achieved through greater integration of the highly decentralised group. The new owner will support FDG Group’s growth, with further add-on acquisitions planned.

After completing the three new investments and two divestments announced so far in FY17, DBAG’s portfolio will comprise 27 holdings, including two international buyout funds in the final stages of realisation (with a total of three remaining investments, representing c 3% of DBAG’s portfolio value). The recent strong pace of activity means that the portfolio is relatively immature, but investments are well spread by vintage, with five held for more than five years and 10 held for less than two years at end-December 2016. Although the portfolio holds a relatively small number of investments, it is not overly concentrated, with the top five holdings representing 41% of the portfolio by value at end-2016. At the same date, 76% of the portfolio by value was represented by companies from DBAG’s four core sectors of expertise: mechanical & plant engineering, automotive suppliers, industrial services providers and industrial components manufacturers (see Exhibit 1). While focused on these sectors, companies held in the portfolio operate across a wide range of industries with different dynamics and further diversification is provided by the 24% of the portfolio represented by companies operating in consumer-related industries.

DBAG’s fund services business is not restated at fair value and therefore DBAG’s reported NAV does not reflect the prevailing market value of this business, while DBAG’s share price reflects the value of both DBAG’s investment and fund services businesses. We see the value of DBAG’s fund services business as the explanation for its shares trading at a premium to NAV in contrast with the majority of its listed private equity peers. In our view, the current c €130m premium to NAV largely represents the value that the market is attributing to DBAG’s fund services business. It is difficult to assess this valuation against the historical earnings of the fund services business, as these have varied between an €8.0m profit and a €3.0m loss over the last three years. DBAG management expects fee income to rise from €19.5m in FY16 to c €29.0m in FY18 due to the additional fees generated by DBAG Fund VII. We see this translating into fund services earnings between €4m and €7m in FY17 and FY18, giving a market-implied valuation multiple between 19x and 33x earnings.

As illustrated in Exhibit 4, DBAG shares have traded almost continuously at a premium to NAV since end-October 2014, when DBAG started reporting separately on its two business segments. The current 34.1% share price premium to NAV compares with a one-year average premium of 23.1% and a recent peak premium of 43.5%.

Exhibit 5 shows a comparison of DBAG with a selected peer group of listed private equity investment companies. DBAG is differentiated from the majority of its listed private equity peers by its focus on German mid-market companies and its fund services business. Relative to the peer group average, DBAG’s NAV total return in sterling terms to 31 December 2016 is lower over one and three years, ahead over five years and substantially ahead over 10 years. Although weaker over one year, DBAG’s share price total return has outperformed its NAV total return over three, five and 10 years to end-December 2016, which reflects the shares moving to trade at a premium to NAV since DBAG first reported separately on its fund services business at end-FY14. Similar to 3i, which also manages third-party funds, DBAG’s shares are trading at a substantial premium to NAV in contrast to the majority of the peer group, some of which are trading at a significant discount to NAV. DBAG’s 3.5% dividend yield is slightly above the peer group median but below the average (largely due to Electra Private Equity’s yield being inflated by its March 2017 special dividend).