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Strong firepower for new acquisitions

Deutsche Beteiligungs 16 August 2021 Review
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Deutsche Beteiligungs

Strong firepower for new acquisitions

Investment companies
Private equity

16 August 2021

Price

€37.90

Market cap

€712.7m

NAV*

€643.3m

NAV per share*

€34.21

Premium to NAV

10.8%

*As at end-June 2021.

Yield

2.1%

Shares in issue

18.8m

Code

DBAN

Primary exchange

Frankfurt

AIC sector

Flexible Investment

52-week high/low

€39.07

€25.65

€34.21

€27.40

Gearing

Net cash at end-Q321

15.4%

Fund objective

Deutsche Beteiligungs is a German-based and listed private equity investment and fund management company. It invests in mid-sized companies in Germany and neighbouring German-speaking countries via MBO transactions and growth capital financings. It focuses on growth-driven profitable businesses valued at €50–250m. DBAG’s core objective is to sustainably increase net asset value.

Bull points

Solid track record, with an average management buyout exit multiple of 2.7x.

Growing exposure to broadband, IT and healthcare.

Stable and recurring cash flow from fund services.

Bear points

Significant exposure to German industrials may weigh on performance in a prolonged recovery scenario.

Ample dry powder in the market translating into high competition for quality assets.

High valuations in most resilient sectors.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

Deutsche Beteiligungs is a research client of Edison Investment Research Limited

Deutsche Beteiligungs (DBAG) posted a 24.5% NAV total return in 9M21, even after the dilutive impact of the recent €100m share issue. This was mainly a function of improved earnings expectations of portfolio companies, coupled with disposal gains on DNS:Net and Rheinhold & Mahla, as well as a €26.0m uplift upon the announced exit from blikk. Results were further supported by the profit from DBAG’s fund services (up to €13.9m in 9M21 vs €6.6m in 9M20) following the start of DBAG Fund VIII’s investment period. While DBAG closed only one acquisition in Q321 (R+S, its second long-term investment), the management underlines the continued strong pipeline of opportunities (up to 86 in Q321 vs 81 in Q221).

Implied FY21e earnings multiple of DBAG’s fund services segment vs peers

Source: Refinitiv, Edison Investment Research. Note: *See Valuation on page 6 for a detailed description of our underlying assumptions.

Why consider Deutsche Beteiligungs now?

DBAG is a well-established player in the German private equity (PE) mid-market. It has been increasing its exposure to new ‘growth’ sectors, which currently make up 43% of its portfolio and have proved resilient in the COVID-19 crisis. In particular, these include broadband/telecom businesses (25%), which are a play on the secular trend of network roll-out in Germany. At the same time, DBAG’s industrial portfolio (currently valued slightly below acquisition cost on average) may appeal to investors seeking exposure to cyclical value companies, even if their earnings recovery has been partially curbed by supply bottlenecks and cost inflation recently.

The analyst’s view

DBAG’s shares currently trade at a 10.8% premium to NAV, visibly below the five-year average of 18.6%. If we assume that DBAG’s PE investments segment is valued at a discount to NAV in line with its peers (currently at 11%), it implies a P/E multiple for DBAG’s fund services business of 9.0x based on new management guidance of segmental profit of 16–17m for FY21e. This implies a c 69% discount to the current average FY21e multiple for listed alternative asset managers of c 29x (based on Refinitiv consensus), suggesting that DBAG’s current market valuation may be relatively undemanding. DBAG’s shares now offer a dividend yield of 2.1% based on the FY20 pay-out of €0.80 per share. While the dividend per share is unlikely to return to pre-COVID-19 levels (€1.50 in FY19) in the near term, we note that DBAG’s dividend policy is for a stable or rising dividend per share, with a mid-term FY23 target of €1.00–1.20 communicated last year.

9M21: Higher earnings expectations versus end-2020

DBAG reported net income of €131.2m in the first nine months of FY21 (9M21) ending June 2021 (versus a €24.6m loss in 9M20, see Exhibit 1), driven mainly by strong revaluations in the PE segment, which posted a €118.0m pre-tax profit (versus a loss of €31.2m in 9M20).

Exhibit 1: Income statement by segment (€m)

9M21

9M20

y-o-y

Net income from investment activity

126.8

(25.3)

N/A

Other income/expenses

(8.8)

(6.0)

47%

Private equity investments pre-tax profit

118.0

(31.2)

N/A

Fund services income

32.5

21.4

52%

Other income/expenses

(18.6)

(14.8)

26%

Fund services profit pre-tax

13.9

6.6

111%

Consolidated net profit

131.2

(24.6)

N/A

Source: DBAG

The result of the PE investments segment in 9M21 was primarily assisted by improved earnings expectations in portfolio companies (€113.4m, see Exhibit 2), especially in the broadband/telecom sector (including the impact from several bolt-on acquisitions completed by one of the platform investments), IT services/software companies and one company within the ‘other’ sectors bucket. Having said that, manufacturing businesses and related service providers (including automotive suppliers) also had a positive contribution. This, however, has been partially offset by supply bottlenecks, raw materials cost inflation and higher freight rates.

A further €35.1m positive effect came from the change in valuation multiples, including €26.0m attributable to the uplift upon the disposal of the blikk radiology group agreed in Q321. The remaining upward revaluations came mostly from broadband/telecom and IT services/software businesses, partially offset by write-downs of DBAG’s holdings in automotive suppliers. Change in debt had a €28.1m negative impact, mostly associated with the financing of bolt-on acquisitions. We note that the share of companies with a net debt to EBITDA ratio above 3.0x fell to 45% at end-June 2021 from 72% at end-September 2020 on the back of improved earnings (see Exhibit 5). Finally, the company recognised a €19.8m net result of disposals, which includes: 1) a €4.2m gain on the sale of Rheinhold & Mahla (RM); 2) a €13.5m gain on the disposal of DNS:Net; and 3) the result on the disposal of DBAG’s stake in the remaining externally managed foreign buyout fund.

DBAG values its portfolio at 1.34x cost at end-June 2021 (versus 1.3x at end-March 2021, 1.2x at end-December 2020 and 1.1x at end-September 2020), with its industrial portfolio still valued slightly below acquisition cost (at 0.9x), reflecting the COVID-19 impact and structural changes in the automotive sector. At the same time, its five broadband/telecom holdings are on average valued at a healthy 3.7x cost.

Exhibit 2: Net gains and losses on portfolio measurement and derecognition (€m)

9M21

9M20

Changes in fair value of unlisted investments

121.9

(41.9)

Change in earnings

113.4

(61.3)

Change in debt

(28.1)

(42.1)

Change in multiples

35.1

60.6

Change in exchange rates

(0.4)

0.2

Change, other

1.9

0.8

Net result of disposal

19.8

1.6

Other

(0.3)

(0.1)

Total

141.5

(40.3)

Source: DBAG

The fund services segment reported a €13.9m pre-tax profit in 9M21 (significantly up from €6.6m in 9M20), with income up to €32.5m from €21.3m in 9M20, mostly on the back of fees from DBAG Fund VIII, whose investment phase started in August 2020 (€13.9m fees in 9M21) as well as capital calls from the top-up funds of both DBAG Fund VII and VIII. We note that the main funds collect fees based on committed capital, while fees from their respective top-up funds are based on capital invested. The above was partially offset by the decline in fees from DBAG Fund VII to €10.8m from €13.1m last year, as these are now calculated based on invested rather than committed capital. Net expenses for the segment increased to €18.6m from €14.8m in 9M21, primarily due to higher provisions for variable remuneration, as well as team expansion.

Recent portfolio developments

Blikk sold at a solid 2.1x MOIC to EQT Infrastructure V

On 9 July 2021, DBAG announced the sale of blikk, which marks the third disposal from DBAG’s ‘growth’ portfolio and the first exit done by DBAG Fund VII. DBAG achieved a multiple of invested capital (MOIC) of 2.1x, which is attractive given the relatively short holding period as the business was acquired in May 2019 (the transaction was agreed in March 2017, but closure was delayed due to a prolonged regulatory approval process). As mentioned above, the sale was carried out at a c €26.0m uplift to carrying value as at end-June 2021 and is expected to close in Q421.

Blikk is a group of radiology and nuclear medical service centres, which DBAG developed by initially acquiring two radiology practices (from a group of 18 physicians) and subsequently adding new centres through bolt-on acquisitions, growing the business to €95m of revenues and 732 employees in 2020. Over the holding period, DBAG invested €18.7m in the entity (for an 11% stake), and DBAG Fund VII provided a further €87.0m (holding together with DBAG a 61.7% stake). We note that in January 2021, the nephrology division of the blikk group (managed by operasan) was spun off and will be developed as a separate healthcare platform investment. DBAG Fund VII acquired a 71% stake in operasan, of which 13% is attributable to DBAG, which invested €3.2m.

Blikk is being acquired by the EQT Infrastructure V fund, which agreed to purchase stakes held both by DBAG and its MBO fund, as well as the stake held by blikk’s management. DBAG will reinvest part of the proceeds and will hold an up to 15% stake (of which up to 3% will be attributable to DBAG, which will pay a low-single digit million-euro amount). We consider the deal another indication of the interest of foreign institutional investors (including infrastructure funds) in the German PE market supporting DBAG’s exit activity. Earlier this year, DBAG sold its stake in broadband telecom business DNS:Net to 3i Infrastructure at a very healthy 5.8x MOIC (the transaction was closed in June 2021 and is described in detail in our previous update note).

Agreement to sell Telio to Charterhouse Capital Partners

DBAG agreed to sell Telio Management in June 2021 after an over five-year holding period (initial investment in April 2016) at a 1.8x MOIC, which is somewhat below DBAG’s long-term historical average multiple on buyout investments of c 2.7x (though still representing an 80% gross return). The exit valuation is in line with Telio’s last prior carrying value, hence DBAG has not recognised any uplift on the deal.

Telio specialises in developing, installing and operating communications and media systems for correctional facilities (currently covering 700 facilities in 21 countries). DBAG and DBAG Fund VI invested €74.5m for an 83% stake in the company (of which €14.3m and 15.3% were attributable to DBAG, respectively). Telio’s +22% revenue CAGR since DBAG’s initial investment to €83.0m in 2020 was supported by both organic growth and acquisitions (two of which involved additional funding from DBAG). The company is being sold to Charterhouse Capital Partners, a UK-based PE investor focusing on European mid-market opportunities. DBAG and DBAG Fund VI will reinvest part of the disposal proceeds into a c 13% stake in Telio (of which 2.5% will be attributable to DBAG).

Ample new investment opportunities, one deal closed in Q321

DBAG’s recently adopted strategy assumes c €120m new investments per annum in the current and subsequent two years. So far, the company has invested €58.2m in the first nine months of FY21 (ending September 2021), which includes in particular the acquisitions of congatec, operasan and R+S Group (which combined represent a c €43m investment), with the rest likely being add-ons to existing platform investments. In Q321, DBAG completed the acquisition of R+S and the merger of DING and Vitronet (discussed in detail in our previous update note). The merger did not involve any additional DBAG funding. We note that no major further investments were agreed in Q321 (except for the re-investments in minority stakes in blikk and Telio). However, DBAG’s management underlines the continued solid number of new investment opportunities the company is pursuing (see Exhibit 4). We acknowledge that PE deals require a certain amount of time to be completed and the timing of deal closure may at times be difficult to predict.

Exhibit 4: DBAG’s available investment opportunities by quarter

Source: DBAG

DBAG continues to have ample dry powder for new investments, which stood at €205.5m at end-June 2021 (covering c 75% of its co-investment commitments alongside DBAG funds), according to the management. This includes €159.3m of financial resources (26% of DBAG’s NAV) and the €46.2m undrawn part of the credit facility. DBAG also has €7.9m of cash held at the level of its investment entity subsidiaries. On top of this, the company will receive the proceeds from the sale of blikk and Telio (net of the reinvestment amount, which has not been confirmed yet) and a €24.8m deferred advisory fee to DBAG Fund VII accrued until end-June 2021 (DBAG communicated earlier that its intention is to collect the fee from the proceeds of the first exit of the fund, which will be blikk). DBAG plans to repay the drawn part of its credit facility (€60.5m) upon receipt of these proceeds.

As at end-June 2021, DBAG’s portfolio is valued at €541.6m and consists of 32 companies. The exposure to German industrials is gradually decreasing, yet it still accounts for 39% of portfolio value (-7pp y-o-y). DBAG’s new investment activity is focused on new ‘growth sectors’ – broadband/telecommunications, IT and healthcare – which already comprise 43% of the portfolio (+5pp y-o-y, supported by their performance).

Exhibit 5: DBAG’s portfolio split at end-June 2021

By sector

By net debt to EBITDA*

Source: DBAG. Note: *The ‘other’ category consists of companies agreed to be sold.

Valuation: Premium below historical average

DBAG’s NAV (defined as equity value) is almost entirely attributable to its PE investments portfolio, and the valuation of the fund services segment represents only a small fraction of NAV. Having said that, DBAG manages third-party assets of c €2.6bn (end-June 2021) and generates considerable fees. We believe the fact that DBAG’s shares regularly trade at a premium to NAV is due to the market-implied value of the fund services segment (Exhibit 7). DBAG shares currently trade at a 10.8% premium, significantly below the five-year average of 18.6%.

Assuming that the market assigns no discount to the reported carrying value of DBAG’s PE investments (in line with LPX Europe index, which now trades broadly at par with NAV), the current market-implied premium translates into €69.4m of value attributed to the fund services segment, which in turn translates into a 6.6x earnings multiple of the segment. On the other hand, DBAG’s direct peers (see Exhibit 9) excluding 3i and Eurazeo (which similarly to DBAG manage third-party assets) trade at a median discount of c 12.3%, which would imply a value for DBAG’s fund services business of €148.6m and an earnings multiple of 9.0x.

Exhibit 6: Analysis of DBAG’s market value by segment

Approach

Private equity investments
at NAV

Private equity investments
in line with peers*

Discount applied to private equity investments value

0.0%

(12.3%)

Implied value of private equity investments segment (€m)

643.3

564.2

Implied value of fund services segment (€m)

69.4

148.6

Implied FY21e earnings multiple of fund services segment**

6.6

9.0

Source: DBAG, Edison Investment Research. Note: *Peer group median excluding 3i and Eurazeo. **Based on the mid-point of management guidance.

Exhibit 7: Share price premium (discount) to NAV over three years (%)*

Source: Refinitiv, Edison Investment Research. Note: *Recent discount adjusted for the share issue.

We have decided to compare the above implied value of DBAG’s fund services business with listed asset managers with exposure to alternative unlisted assets, such as real assets, PE or infrastructure. We have selected companies that focus predominantly on closed-end (or similar) structures as we believe that one of the differentiating factors in the asset management industry is the ease of capital outflow potentially decreasing prospective fee income. Having said that, companies listed in Exhibit 8 fulfil this requirement to varying degrees, with the highest share of AUM managed through open-end funds of 46% (Cohen & Steers). We also underline that the group includes some players with significantly higher AUM than DBAG (eg Blackstone or Partners Group). Moreover, some of the managers invest their own capital, with the highest share reported by Intermediate Capital (c 13% of AUM).

Keeping the above in mind, we estimate that based on the 9.0x earnings multiple, the fund services segment is valued at a 69% discount to the average FY21e P/E multiple of the above-mentioned listed alternative asset managers of c 29.1x (based on Refinitiv consensus, see Exhibit 8). This suggests that DBAG’s current market valuation may be relatively undemanding.

Here, it is worth keeping in mind that DBAG’s mid-term ambition to FY23 assumes a lower income from fund services of €10–11m (which at the mid-point implies an earnings multiple at 14.1x and a still wide c 51% discount to the average FY21e P/E multiple of the peer group). However, we understand that it does not account for any new MBO fund, while DBAG has historically launched a new fund every three to four years (the most recent was launched last year). At the same time, the management ambitions factors in the decline in fee income from earlier funds (most notably DBAG Fund VI and DBAG Fund VII).

Exhibit 8: Asset management companies peer group at 16 August 2021*

Company

Market capitalisation (US$m)

Assets under management

FY21 P/E
(x)

AUM split

DBAG

835

€3bn

N/A

Private equity and debt (100%)

Blackstone

138,000

US$649bn

30.5

Private equity (32%), real estate (30%), credit & insurance (25%), hedge fund solutions (13%)

EQT

49,965

€71bn

33.6

Real assets (52%), private capital (48%)

Partners Group

46,794

US$109bn

39.0

Private equity (50%), private debt (22%), private real estate (14%), private infrastructure (14%)

Intermediate Capital

8,856

€45bn

19.0

Corporate investments (52%), capital market investments (29%), real assets investments (10%), secondary investments (9%)

Tikehau Capital

    5,351

€31bn

28.3

Real assets (35%), private debt (32%), capital markets strategies (15%), private equity (13%), direct investments (5%)

Cohen & Steers

4,254

US$96bn

23.9

Open-end funds (46%), institutional accounts (42%), closed-end funds (13%)

Source: Companies data, Refinitiv. Note: *AUM value and split as at latest available data.

Peer group comparison

In Exhibit 9 we present DBAG’s peers focused on PE investments. We underline that only 3i combines both DBAG’s business models of managing its own portfolio and external capital, which explains its prevailing premium to NAV. DBAG’s NAV return falls behind the peer group average across one to 10 years, which stems from lower returns directly before the COVID-19 outbreak (affected by the slowdown in the German manufacturing sector), as well as a slightly below average return in the last year. The peers trade at discounts of 7–21% to their NAV, except for 3i, GIMV and HgCapital Trust (the latter has a tech-heavy portfolio that is likely more appealing to investors). DBAG’s dividend yield falls slightly behind the average, but we need to note that only DBAG, Eurazeo and GIMV pay their dividend once a year and their last 12 months’ yield is still fully affected by the lower pay-out associated with the COVID-19 uncertainty.

Exhibit 9: Listed private equity investment companies peer group at 10 August 2021*

% unless stated

Region

Market cap £m

NAV TR 1y

NAV TR 3y

NAV TR 5y

NAV TR 10y

Price TR 1y

Price TR 3y

Price TR 5y

Price TR 10y

Premium/
(discount)

Dividend yield

Deutsche Beteiligungs

Europe

604

20.8

29.2

92.9

173.6

16.4

13.9

67.4

170.3

10.8

2.1

3i

Global

13,006

26.6

55.9

148.0

362.5

45.5

45.2

154.4

510.0

28.3

2.9

Eurazeo

Global

5,965

34.4

32.3

83.4

131.0

55.6

19.9

76.3

155.0

(10.8)

1.7

GIMV

Global

1,250

8.0

4.4

39.6

62.9

(0.3)

15.7

38.8

101.8

12.9

4.5

HgCapital Trust Ord

UK

1,734

43.3

88.0

162.5

286.1

53.2

95.9

235.6

305.1

17.5

1.3

ICG Enterprise Trust

UK

793

29.8

53.1

108.7

199.9

44.5

31.4

114.5

231.7

(17.4)

2.3

Oakley Capital Investments

Europe

627

25.6

77.0

117.4

159.7

71.7

109.7

224.1

172.2

(21.1)

1.3

Princess Private Equity

Global

793

19.8

43.8

92.6

161.7

37.3

45.3

138.5

249.5

(7.2)

4.7

Standard Life Private Equity

Europe

696

23.0

48.2

98.5

194.3

69.0

60.6

149.0

284.4

(20.0)

3.0

Average

3,108

26.3

50.3

106.3

194.8

47.1

53.0

141.4

251.2

(2.2)

2.7

Rank

9

7

8

6

5

8

9

8

7

4

6

Source: Morningstar, Edison Investment Research. Note: *12-month NAV performance in sterling terms based on end-June 2021 ex-par NAV, or latest earlier available ex-par NAV (end-April for ICG Enterprise Trust and end-March for HgCapital Trust and GIMV).

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This report has been commissioned by Deutsche Beteiligungs and prepared and issued by Edison, in consideration of a fee payable by Deutsche Beteiligungs. 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.

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Copyright: Copyright 2021 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.

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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

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