Deutsche Beteiligungs — On track to meet the FY23 guidance

Deutsche Beteiligungs (FRA: DBAN)

Last close As at 20/04/2024

EUR27.15

−0.10 (−0.37%)

Market capitalisation

EUR511m

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Research: Investment Companies

Deutsche Beteiligungs — On track to meet the FY23 guidance

Deutsche Beteiligungs (DBAG) posted a 20% NAV total return in the nine months to end-June 2023, thereby recouping the valuation loss in FY22. The uplift to last carrying value from its recently agreed sale of R+S (implying a healthy internal rate of return of over 40%) contributed €14m to its net income in Q323. As a result, management now expects FY23 results to be at the upper half of its guidance of net income at €85–115m and NAV of €610–715m. DBAG’s asset management business delivered a profit of €11.3m in 9M23, on track to meet management’s FY23 guidance of €13–15m. DBAG’s shares currently trade at a c 15% discount to last reported NAV (with the latter not capturing the value of the asset management business).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Deutsche Beteiligungs

On track to meet FY23 guidance

Investment companies
Private equity

23 August 2023

Price

€30.50

Market cap

€573.6m

NAV*

€678m

NAV per share*

€36.04

Discount to NAV

15.4%

*As at end-June 2023.

Yield

2.6%

Shares in issue

18.8m

Code/ISIN

DBAN/DE000A1TNUT7

Primary exchange

Frankfurt

52-week high/low

€31.60

€20.85

€36.04

€30.81

Gearing

Net gearing at 30 June 2023

0.0%

Fund objective

Deutsche Beteiligungs is a German-based and listed private equity investment and fund management company that invests in mid-sized companies in Germany and neighbouring countries via management buyout transactions and growth capital financings. There is a focus on growth-driven profitable businesses valued between €50m and €250m. It also manages c €2bn of third-party capital, which generates stable recurring fee income.

Bull points

Solid track record, with an average MBO exit multiple of 2.7x as at end-FY22.

Higher emphasis on ‘growth sectors’, such as IT services and software, healthcare and broadband telecom, as well as on energy transition/sustainability themes.

Stable and recurring cash flow from fund services.

Bear points

Significant exposure to German industrials, which have been facing macroeconomic headwinds.

Public markets downturn, macro uncertainty and higher interest rates are translating into lower private equity deal volumes.

Higher average leverage of portfolio companies versus pre-COVID-19 levels.

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 20% NAV total return in the nine months to end-June 2023, thereby recouping the valuation loss in FY22. The uplift to last carrying value from its recently agreed sale of R+S (implying a healthy internal rate of return of over 40%) contributed €14m to its net income in Q323. As a result, management now expects FY23 results to be at the upper half of its guidance of net income at €85–115m and NAV of €610–715m. DBAG’s asset management business delivered a profit of €11.3m in 9M23, on track to meet management’s FY23 guidance of €13–15m. DBAG’s shares currently trade at a c 15% discount to last reported NAV (with the latter not capturing the value of the asset management business).

DBAG offset its FY22 NAV TR losses on the back of strong 9M23 returns

Source: Deutsche Beteiligungs, Edison Investment Research

An experienced player in the German PE mid-market

DBAG is a well-established investor and asset manager in the private equity (PE) mid-market and a go-to partner for private company owners, especially families and founders, across Germany and neighbouring countries (eg Italy). It has a number of holdings in German industrials, as well as the industrial technology and services sector, representing 48% of its portfolio value at end-June 2023. This may appeal to investors seeking exposure to cyclical value companies in anticipation of a potential rebound in the German economy. That said, it has been tapping into a wider opportunity set more strongly for several years now, with significant exposure to so-called ‘growth’ sectors, including IT services and software (20% of end-June 2023 portfolio value), healthcare (11%) and broadband/telecom businesses (11%).

Exploring the lower end of the mid-market

While DBAG’s new investment activity in the first nine months of FY23 (9M23) was centred on add-on investments, the company announced in July 2023 three new majority stake acquisitions: AOE Group (an agile software provider), Avrio Energy (a biogas platform) and TBD (a critical infrastructure service provider). These deals were at the lower end of DBAG’s target range in terms of enterprise value (€50–250m). DBAG sees more opportunities in this market segment at present, given the better debt availability for funding smaller transactions. We note that the Avrio Energy and TBD investments, as well as the partial reinvestment of R+S proceeds into a minority stake in NOKERA (strategic buyer), indicate DBAG’s growing interest in energy transition/sustainability themes.

9M23 NAV TR reached 20%

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.

Exhibit 1: Income statement by segment (€m)

9M23

9M22

Q323

Q322

Net income from investment activity

113.6

(78.8)

32.3

(43.0)

Other income/expenses

(9.8)

(9.1)

(4.2)

(3.3)

PE investments pre-tax profit

103.9

(87.9)

28.1

(46.3)

Fund services income

35.2

32.9

12.6

11.0

Other income/expenses

(23.9)

(23.5)

(8.6)

(7.3)

Fund services profit pre-tax

11.3

9.4

4.0

3.7

Consolidated net profit

114.3

(78.3)

31.7

(42.5)

Source: Deutsche Beteiligungs

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

9M23

9M22

Q323

Q322

Changes in fair value of unlisted investments

56.4

111.5

18.8

(51.0)

Change in earnings

74.8

109.0

21.1

17.6

Change in debt

(70.1)

(51.5)

(17.3)

(14.2)

Change in multiples

96.7

(169.4)

25.5

(53.4)

Change in exchange rates

(3.1)

0.7

0.9

0.9

Other

(42.0)

(0.3)

(11.3)

(1.9)

Net result of disposal

63.3

13.9

16.6

0

Total

119.7

(97.6)

35.4

(51.0)

Source: Deutsche Beteiligungs

R+S exit results in an unexpected €14m contribution to Q323 net income

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.

Positive earnings contributions across sectors in 9M23, portfolio net debt up to fund add-ons

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).

Steady earnings from DBAG’s asset management business

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).

Recent MBOs indicate DBAG’s emphasis on energy transition plays

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:

AOE Group – an agile software provider with a focus on bespoke enterprise solutions.

Avrio Energie – a biogas platform with a capacity of 77GWh per year.

TBD Technische Bau Dienstleistungen – a critical infrastructure construction service provider, which for instance recently carried out the weld seam tests for the LNG terminal project in Wilhelmshaven.

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.

Exhibit 3: DBAG’s portfolio composition

Source: Deutsche Beteiligungs

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.

Retaining a solid liquidity position for new investments

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).

Valuation

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.

Exhibit 4: Share price premium/(discount) to NAV over five years (%)

Source: Refinitiv, Edison Investment Research

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.

  Blackstone, EQT, Partners Group, Intermediate Capital, Tikehau Capital and Cohen & Steers.

Exhibit 5: Analysis of DBAG’s market value by segment 

Fund services in line with peers

Earnings multiple applied to fund services segment’s valuation

19.2x

Implied value of fund services segment*

€268.2m

Implied value of private equity investments segment

€305.4m

Implied discount of private equity investments value to DBAG’s end-June NAV

55%

Private equity investments in line with peers

 

Discount applied to private equity investments value to DBAG’s end-June NAV

30.2%

Implied value of private equity investments segment

€472.9m

Implied value of fund services segment

€100.7m

Implied FY23e earnings multiple of fund services segment*

7.2x

Source: Deutsche Beteiligungs, Edison Investment Research. Note: *Based on the midpoint of management guidance.

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.

Exhibit 6: Listed PE investment companies peer group at 23 August 2023*

% unless stated

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

489

17.4

36.4

45.9

189.2**

16.3

3.0

0.8

139

(15.4)

2.6

3i

18,547

33.0

134.4

187.0

744.9

81.7

159.8

159.2

743

5.0

2.8

GIMV

993

(0.2)

21.8

17.5

89.9

(14.5)

(13.9)

(4.1)

62

(13.3)

6.2

HgCapital Trust

1,666

10.3

108.7

173.9

386.0

14.4

66.0

112.3

329

(22.7)

1.9

ICG Enterprise Trust

713

8.2

79.4

111.6

258.6

6.1

60.8

46.2

195

(43.8)

2.9

Oakley Capital Investments

793

6.0

91.0

169.9

272.0

15.4

112.0

159.0

232

(32.2)

1.0

Princess Private Equity

637

9.7

32.3

58.8

191.3

(11.8)

21.1

28.2

183

(26.9)

3.4

abrdn Private Equity Opps

660

4.9

87.1

116.6

291.9

1.0

76.0

67.3

248

(42.6)

3.5

Median

793

8.2

87.1

116.6

272.2

6.1

66.0

67.3

232.4

(26.9)

2.9

Rank

8

2

6

7

7

2

7

7

7

3

6

Source: Morningstar, Edison Investment Research. Note: *12-month NAV performance in sterling terms based on end-June 2023 ex-par NAV, or latest earlier available ex-par NAV (end-March 2023 for GIMV and HgCapital Trust, end April 2023 for ICG Enterprise Trust). **The 10-year period for DBAG is calculated starting from end-July 2013 as end-June 2013 NAV is not available.


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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 £60,000 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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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 £60,000 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.

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United Kingdom

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Research: TMT

Nano Dimension — Strengthening the product portfolio

Nano Dimension reported Q223 revenue growth of 33% year-on-year and maintained its adjusted EBITDA at a similar level to Q123, reflecting continued investment in R&D. No longer looking to acquire a majority stake in Stratasys, the company is considering its options regarding its 14% holding and continues to seek alternative targets, recently making a small technology acquisition in the design software market.

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