Deutsche Beteiligungs — On track to meet the FY23 guidance

DBAG maintained its solid performance with a 20% NAV total return (TR) during the nine months to end-June 2023 (of which 5% in Q323) and a 9M23 net profit of €114.3m (compared to a €78.3m loss in 9M22, see Exhibit 1). This was assisted by an expansion in valuation multiples across the portfolio (€96.7m contribution to net gains on measurement, see Exhibit 2, of which €25.5m in Q323) on the back of both higher public market multiples (with SDAX and DAX up since end-September 2022 by 27% and 33%, respectively, though remaining broadly flat between March and June 2023) and uplifts upon successful disposals.

DBAG’s most recent exit was R+S (a provider of technical building services), announced in July 2023 and expected to close around November/December 2023. R+S was DBAG’s second long-term financing made entirely from its own balance sheet, completed in May 2021. This kind of transaction involves a minority equity investment into a company seeking reliable long-term funding and is complementary to DBAG’s standard management buyouts (MBOs) of majority positions (carried out alongside one of the funds DBAG manages).

DBAG decided to realise the investment after a relatively short holding period of around two years, encouraged by the attractive price offered by a strategic investor (NOKERA), translating into an internal rate of return of over 40%. NOKERA was particularly attracted to R+S by the latter’s exposure to the heat pump segment, according to DBAG’s management. The uplift to previous carrying value implied by the disposal price contributed €14m to DBAG’s net income in Q323 (DBAG invested €18m in total into R+S).

As a result, DBAG’s management communicated alongside the deal announcement that it expects the company to reach the upper half of its FY23 guidance (raised in April 2023) of net income in the range of €85–115m (9M23: €114.3m) and NAV of €610–715m (vs €677.8m at end-June 2023). Part of the R+S exit proceeds will be reinvested in a minority stake in the private company NOKERA, which is a producer of buildings in serial and sustainable construction and positions itself as the largest technology-enabled platform for serial timber production.

The change in portfolio earnings added €74.8m to its net gains on measurement in 9M23 (of which €21.1m was in Q323), with DBAG reporting positive contributions across all sectors on the back of improved earnings expectations and add-on acquisitions (four closed in Q323). That said, this was largely offset by a €70.1m negative valuation impact from the change in debt of portfolio companies in 9M23 (of which €17.3m was in Q323), with the leverage increase mostly attributable to the above-mentioned add-on acquisitions. At end-June 2023, 60% of DBAG’s portfolio companies by value had a net debt to EBITDA ratio of 4.0x or above (slightly down from 64% at end-March 2023) and a further 22% had a ratio of at least 3.0x but below 4.0x (8% at end-March 2023).

DBAG’s fund services segment delivered €35.2m of income in 9M23 (vs €32.9m in 9M22), primarily reflecting management fees from DBAG Fund VIII (€14.4m) and DBAG Fund VII (€13.2m). Fund services profit came in at €11.3m, up c 20% y-o-y in the absence of major one-off severance payments (which affected last year’s results).

In recent years, DBAG has been raising a new fund every four years: DBAG Fund VI in 2012, DBAG Fund VII in 2016 and DBAG Fund VIII in 2020. Therefore, we believe that DBAG could next year decide to launch the successor of DBAG Fund VIII (whose investment period ends in December 2026), boosting the company’s recurring fee income (though at some stage this will be partly offset by declining fees from DBAG Fund VII as it gradually realises its portfolio).

DBAG’s activity in 9M23 was focused on add-on acquisitions, with four transactions completed and two further agreed. This includes three bolt-on acquisitions on behalf of akquinet, and the in-tech, MTWH and operasan transactions (with DBAG’s total equity contribution to these add-ons c €12m). However, in July 2023 DBAG agreed to three new majority investments (on top of the minority investment in NOKERA described above), all of which management expects to close by end-August 2023:

The Avrio Energie, TBD and NOKERA acquisitions (as well as some earlier investments, eg Itelyum) illustrate DBAG’s shift within its industrials portfolio (including industrial technology and services, see Exhibit 3) away from the German traditional capital goods sectors (eg automotive, which has been facing headwinds in recent years) towards energy transition/sustainability plays, which often have a more defensive profile (eg TBD). This is coupled with a significant share of growth sectors in DBAG’s portfolio (which DBAG started to expand before the COVID-19 pandemic and which we discussed in several previous notes). These include broadband communications, healthcare and more recently IT services and software (AOE Group is DBAG’s seventh investment in the latter sector). The share of growth sectors has been relatively stable since FY20, which is partly due to successful disposals (eg Cloudflight, DNS:Net) and at end-June 2023 stood at c 42% of portfolio value.

In line with management comments related to the new investment opportunities made during the H123 earnings call, DBAG’s recently announced investments were at the lower end of its target range in terms of enterprise value. Management believes that this is due to, among other things, better availability of debt financing for smaller deals currently.

DBAG’s year-to-date exits drove its net cash flow from investment activities to €98.2m in 9M23, translating into €72.9m cash and cash equivalents at end-June 2023 (ie c 11% of NAV). On top of this, DBAG had €106.7m in undrawn credit lines at its disposal, providing it with a comfortable financing position for further investments. DBAG’s outstanding co-investment commitments stood at €263.6m at end-June 2023, which should be gradually drawn until the end of DBAG Fund VIII’s investment period (ie to December 2026). Together with long-term investments made entirely from DBAG’s own balance sheet, management plans to deploy €96m pa on average over 2023–25 (based on November 2022 planning). Part of DBAG’s end-June 2023 liquidity will be deployed into the recently announced investments (eg DBAG disclosed that it will invest €10.3m in AOE Group).

DBAG continues to trade at a discount to last reported NAV (currently at 15%, see Exhibit 4), while historically it traded at a premium to NAV (the five-year average to end-2021 equals 18%), which we believe was due to the share price reflecting the additional value of DBAG’s fund services business, which manages close to €2.0bn of third-party capital and whose value is not captured within its reported NAV. That said, DBAG’s current discount is still narrower than the peer average excluding 3i (which also manages third-party assets and generates fee income, and trades at a c 5% premium to NAV currently); see Exhibit 6.

We have updated our analysis of the market-implied value of both DBAG segments in two scenarios: (1) using the implied value of PE investments, assuming fund services are valued in line with peers; and (2) using the implied value of the fund services segment, assuming that PE investments are valued in line with peers. For peers to DBAG’s fund services segment, we use a group2 of listed asset managers with exposure to alternative unlisted assets, such as real assets or PE (as described in detail in our August 2021 note). In the case of PE investments, we use the peer group shown in Exhibit 6 excluding 3i.

Assuming the fund services segment is valued in line with peers (ie at a 19.2x FY23e earnings multiple) and using DBAG’s current market capitalisation, the implied value of DBAG’s PE investments is €305m (ie 55% below its end-June 2023 NAV), while DBAG’s peers currently trade at an average c 30% discount (excluding 3i, see Exhibit 6). The wider discount may be at least partially justified by DBAG’s high exposure to the German industrials sector (see above), which has been experiencing market headwinds for a prolonged period, even before the pandemic. We believe this is an important factor behind DBAG’s medium-term NAV underperformance versus peers (though we note that DBAG’s one-year NAV TR in sterling terms is the second-highest in the peer group). While the economic outlook for Germany has improved somewhat compared to late 2022 (see our previous note for details), it remains uncertain. We note that in its Economic Forecast Summer 2023 (released in June 2023), the Ifo Institute expects German GDP to contract by 0.4% in 2023, as the economy is only very slowly working its way out of the recession and sticky inflation weighs on private consumption. For 2023, the Ifo Institute now forecasts core inflation of 6.0% (vs 4.9% in 2022) and a private consumption decline of 1.7%.

Based on the latest payment for FY22, DBAG’s dividend yield stands at 2.6%. DBAG’s management decided to recommend a lower DPS to be paid from FY22 profits to secure liquidity in the current environment. Management highlighted in the Q323 report that DBAG’s dividend policy, which provides for a dividend that remains stable and increases whenever possible, remains generally unchanged. It also underlined that three factors continue to play a key role in determining future distributions: 1) inflow of funds from DBAG’s two business segments, including fund services income and net inflows after disposals, 2) future liquidity requirements for (co-)investments, and 3) securing the dividend capacity in the long run.