Deutsche Beteiligungs — Recession in Germany unfolding

Deutsche Beteiligungs (FRA: DBAN)

Last close As at 13/04/2024

EUR26.95

1.15 (4.46%)

Market capitalisation

EUR507m

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Research: Investment Companies

Deutsche Beteiligungs — Recession in Germany unfolding

Deutsche Beteiligungs (DBAG) posted a c 13% NAV decline in total return terms in FY22 (to end-September 2022), affected by lower public equity multiples used in the valuation and macroeconomic headwinds in Germany. In light of its high investment activity in FY22 (€176.8m, skewed towards IT services and software) and faltering private equity exits globally, management has proposed a lower dividend (to preserve capital for new and follow-on investments) of €0.80/share (vs €1.60 paid from FY21 profit), but reaffirmed its mid-term dividend planning of at least €1.60 pa. DBAG now trades at a 17% discount to NAV (versus a five-year average premium of 10%).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Deutsche Beteiligungs

Market outlook: Stagflation materialising

Investment company
Private equity

19 December 2022

Price

€25.60

Market cap

€481m

NAV*

€579m

NAV per share*

€30.81

Discount to NAV

16.9%

*At end-September 2022.

Yield

6.3%

Shares in issue

18.8m

Code/ISIN

DBAN/DE000A1TNUT7

Primary exchange

Frankfurt

AIC sector

Flexible Investment

52-week high/low

€40.50

€20.85

€37.16

€30.81

Gearing

Net gearing at end-FY22

3.8%

Fund objective

Deutsche Beteiligungs is a Germany-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 since 1998.

Growing exposure to ‘growth’ sectors, such as IT software and services.

Stable and recurring cash flow from fund services.

Bear points

Significant exposure to German industrials facing headwinds from geopolitical tensions and a potential recession.

Public markets downturn translating into lower private equity deal volumes and in turn more limited exit opportunities.

Dividend cut due to reduced liquidity at holding level.

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 c 13% NAV decline in total return terms in FY22 (to end-September 2022), affected by lower public equity multiples used in the valuation and macroeconomic headwinds in Germany. In light of its high investment activity in FY22 (€176.8m, skewed towards IT services and software) and faltering private equity exits globally, management has proposed a lower dividend (to preserve capital for new and follow-on investments) of €0.80/share (vs €1.60 paid from FY21 profit), but reaffirmed its mid-term dividend planning of at least €1.60 pa. DBAG now trades at a 17% discount to NAV (versus a five-year average premium of 10%).

Recession in Germany unfolding

DBAG’s annual investments

Source: DBAG, Edison Investment Research

DBAG’s long-term value proposition intact

DBAG is a well-established player in the German private equity (PE) mid-market segment and a go-to partner for private company owners, especially families and founders. This is illustrated by the share of families and founders in DBAG’s management buyouts (MBOs) in 2012–21 at 57% (vs 46% for the broader German mid-market segment) and its overall robust investment activity (with 246 investment opportunities reviewed in FY22). DBAG has a solid track record in terms of profitable exits, with long-term average multiples on invested capital (MOIC) for its buyout and growth investments of 2.7x and 2.9x, respectively. Some recent success stories include Cloudflight (exit agreed in November 2022 at a more than 4.0x MOIC) and DNS:Net (5.8x MOIC on the equity investment in 2021).

The analyst’s view

Several headwinds (discussed later in the note) will likely push Germany into recession in 2023. While this currently weighs on DBAG’s portfolio, some of its ‘growth’ sectors (eg IT services and software, 21% of portfolio value) may prove resilient, while DBAG’s industrial holdings may at some stage start benefiting from the easing of supply chain issues and measures aimed at passing on cost inflation to customers introduced in 2022. The challenges may have already been at least partially discounted, given that its current market capitalisation now implies a c 48% discount to its private investments portfolio value (as per end-FY22, versus the peer average of c 31%), assuming that DBAG’s fund services segment is valued in line with listed alternative asset managers. Hence, improving M&A activity, earnings prospects and investor sentiment could trigger a narrowing of the discount.

Germany likely heading towards a recession

The vast majority of DBAG’s portfolio is in Germany-based companies, with 36% of the portfolio value in industry and industrial technology companies and a further 14% in industrial services businesses (which could prove more sensitive to the economic cycle). Therefore, we believe it is instructive to examine the state of the German economy, which seems to be entering a recession, with major local (eg the Ifo Institute) and international (eg the Organisation for Economic Co-operation and Development, OECD) macroeconomic research teams expecting a real GDP contraction of c 0.10.6% in 2023. This is driven by several persisting and unfolding macroeconomic headwinds in Germany, including the following factors:

High inflation (partly caused by the European energy crisis), both in the producer and consumer price indices, leading to a margin squeeze for some corporates and declining consumer confidence curbing spending (the OECD expects a 0.2% decline in private consumption in 2023). To shield households from the impact of rising gas prices, the German government introduced three energy relief packages (in February, March and September) estimated at €95bn (2.6% of GDP) in direct expenditures and an energy support fund for households and SMEs of €200bn (5.5% of GDP), the latter being effective from 1 January 2023. In November 2022, the OECD expected consumer prices in Germany to increase by 8.5% and 8.0% in 2022 and 2023, respectively (with core inflation at 3.6% and 4.4%, respectively).

Supply chain disruptions resulting in scarcity of materials. While bottlenecks are gradually easing, the share of companies affected by materials shortages remains considerable (59.3% in November vs 63.8% in October, according to a recent survey conducted by the Ifo Institute), most notably in the automotive industry (83.2% of respondents remain affected, up from 74.9% in October).

Although current order backlogs remain high and the German manufacturing industry has full order books (with capacity utilisation at 84.6% in November, above the long-term average of 83.6%, according to the Ifo Institute), new orders have been declining (by 3.2% y-o-y in October 2022 on a calendar-adjusted basis, after -9.8% y-o-y in September 2022), though we note a 0.8% monthly uptick in October.

Labour market shortages. The OECD forecasts the unemployment rate in Germany will stand at 3.1% in 2022, although this may increase amid the economic slowdown to 3.5% in 2023. Still, labour shortages, coupled with an increase in the minimum wage, should keep wage growth high at c 5% pa throughout 2022–24, according to the European Commission.

Subdued private capital outlays, although the OECD expects investment to eventually pick up due to high corporate savings and the need for investments related to relocation of supply chains and renewable energy.

German households and corporates curbed gas consumption…

The major risk factor for the German economy remains the potential gas shortfall due to curbed supply from Russia triggered by the war in the Ukraine (Germany used to cover half of its natural gas needs through imports from Russia). So far, Germany has been weathering the crisis quite well. The unusually warm weather in October (coupled with high gas prices discouraging excessive use) allowed households and small firms with an annual gas consumption of up to 1.5GWh to reduce gas usage by c 43% in the weeks 41–44 of the calendar year versus the corresponding averages in 2018–21, according to the Bundesnetzagentur based on Trading Hub Europe data (though this declined to 13–17% throughout most of November). Moreover, German manufacturing has already reduced gas consumption by around 25% (compared to the average over 2018–21), according to OECD’s publication from November. Energy savings will be further incentivised by a gas auction mechanism for firms to sell their excess gas capacity. According to the latest Ifo Institute survey conducted in October 2022, 75% of corporate respondents said that the gas savings were achieved without reducing output. This, however, will be more difficult going forward, as only 39% of respondents expect to be able to further cut gas use without curbing production, while 12% said that they need to stop production altogether to further reduce gas consumption.

…but savings need to be maintained to avoid rationing

Gas-based electricity production has been reduced and partially replaced by phased-out or reserve coal power plants, which have been reactivated. Moreover, the three remaining nuclear power plants, which were initially scheduled for decommissioning on 1 January 2023, will continue operating until mid-April 2023. Despite the above and the fact that local gas storage sites are close to full, the German regulator (Bundesnetzagentur) forecasts that a 20% gas savings rate across the country needs to be maintained to avoid rationing during the winter season. The Bundesnetzagentur also assumes in its estimates that the planned opening of Germany’s third new liquified natural gas (LNG) terminal will occur at the beginning of 2023 at the latest, and that the extent of the year-on-year decline in gas imports during the winter season and the rebound in exports after the winter season will be moderate.

M&A activity slowing down recently

European PE deal volumes remained stable year-on-year in Q322 in value terms (with deal count up 16.9% y-o-y) and PE exits could reach the second-highest figure from the past decade at end-2022, according to PitchBook. However, activity has weakened as the year has progressed and deal value and count were down 31.6% and 9.6% q-o-q in Q322, respectively; this likely included, to a large extent, transactions agreed in H122. Global economic uncertainty and headwinds, coupled with lower credit availability and higher interest rates, are now putting pressure on the volume of PE deals, making PE assets more difficult to value and in turn resulting in diverging valuation expectations of sellers and buyers. In the near term, deals are more likely to be carried out for a narrow set of high-quality and resilient companies with strong pricing power. This is illustrated by the fall in global M&A transaction announcements in Q322 by 7.4% and 26.3% q-o-q in terms of deal count and value, respectively (according to PitchBook). Nevertheless, we believe the standstill will only be short term, as healthy fund-raising in 2021 left PE investors with considerable amounts of firepower for new investments.

With respect to debt availability, we note that the US leveraged loan market saw institutional new-issue loan volumes of a mere US$21.4bn in Q322 (the weakest level since the post-global financial crisis figure in Q409), which compares to a five-year quarterly average of US$96.8bn, according to Partners Group citing Leveraged Commentary & Data (LCD). This was accompanied by widening average spreads over the Secured Overnight Financing Rate to 491bp for B/B+ rated issuers at end-Q322. Accounting for purchase discounts, this translated into average loan yields of c 9.4% in Q322. Similarly, European leveraged loan issue volumes were a mere €7.0bn in Q322 (only slightly up from €6.6bn in Q222) compared to €24.8bn in Q321 and €41.3bn in Q221. The high-yield bond markets have also experienced a significant slump in new issuances, hitting a 14-year low in Q322, according to PitchBook citing LCD data.

However, private debt funds (most notably direct lenders) have stepped in and filled in part of the funding gap, gaining market share from the high-yield bond and syndicated loan markets. Global private debt funds have grown in recent years and at end-June 2022 had assets under management of c US$1.24tn (including US$425.1bn of dry powder, of which US$168.7bn was in direct lending strategies) versus US$474.3bn (and US$177.6bn in total dry powder) in 2012, according to PitchBook. We note that small- and mid-market buyouts (which DBAG focuses on) may overall be better positioned to tap into this source of funding, as private funds more often focus on this PE market segment (even if some have also been participating in selected large unitranche financings of several billion US dollars for large/mega buyouts). This is illustrated by the average size of European direct lending deals between Q120 and Q222 of c €220m (€721m in Q222 alone), according to PitchBook citing LCD data.

The latest slowdown in M&A deal activity is also illustrated by the shrinking number of new investment opportunities reviewed by DBAG in recent quarters (see Exhibit 2), down c 20% y-o-y on a last 12 months (LTM) basis to end-September 2022 and down c 40% y-o-y between April and September 2022.

Exhibit 1: DBAG’s available investment opportunities by quarter

Source: DBAG

Asset allocation

Investment strategy: Focus on mid-market companies

DBAG operates an integrated business model with two complementary business lines, PE investments and fund investment services, built around DBAG-managed PE funds (DBAG funds), through which DBAG invests alongside third-party investors. Investing through the DBAG-managed funds creates a substantially larger capital base, and hence a broader range of investment opportunities, for DBAG’s own balance sheet investments. The strategy also provides some assurance to third-party investors in the funds that the manager’s interests are aligned with their own.

DBAG invests in well-established companies with proven business models, rather than early-stage businesses or companies requiring restructuring. The companies are often characterised by leading market positions, entrepreneurial management and capacity for innovation, with the prospect of a long-term future for their products.

DBAG expects more investment opportunities to arise in equity minority positions in companies seeking reliable long-term financing. DBAG executes these investments through the DBAG Expansion Capital Fund (ECF), as well as through its own balance sheet. DBAG does not intend to invest in distressed assets as they remain outside of its core strategy.

As well as participating in competitive sale processes, DBAG’s extensive network enables it to originate proprietary deal flow. DBAG’s investment process consists of three phases:

Investing – identification and assessment of transaction opportunities. In FY22, 246 investment opportunities were screened.

Developing – supporting a portfolio company’s development process. DBAG typically supports portfolio companies as a financial investor in a focused partnership role for four to seven years.

Realising – realising value appreciation through a well-timed and well-structured divestment. Investments are usually exited through a trade sale of portfolio companies to an industrial partner with which companies can continue their development but may also involve the sale to a new financial investor or listing as a public company. DBAG has a proven track record of successfully realising investments with an average exit multiple of 2.7x for MBOs and 2.9x for growth financings (see Exhibits 2 and 3).

DBAG’s buy-and-build strategy and expertise is illustrated by its investment in Cloudflight. The partial sale of the company was agreed in November 2022 (DBAG will retain a minority stake) after a holding period of around three years, with DBAG achieving a MOIC above 4x. DBAG invested in the company alongside DBAG Fund VII in June 2019 by creating Cloudflight from software specialist Catalysts and IT research and consultancy firm Crisp Research. Since then, the platform company performed six add-on acquisitions and was able to grow its revenues from €59m in 2019 to €80m in 2021.

Exhibit 2: DBAG’s MBO transactions realised* between 1997 and end-September 2022

Company

Investment
date

Divestment
date

Holding period (years)

Exit
route

Exit
multiple (x)

Sjølund

Jan-18

Q422

N/A (c 4.5)

Write-off**

0.0

Infiana Group GmbH

Dec-14

Sep-19

4.8

Secondary buyout

2.2

Unser Heimatbäcker GmbH

May-14

Jan-19

4.6

Write-off

0.0

CleanPart Group GmbH

Apr-15

Oct-18

3.5

Trade sale

2.4

Formel D GmbH

May-13

Jul-17

4.2

Secondary buyout

4.9

ProXES GmbH

May-13

Jul-17

4.2

Secondary buyout

5.4

ZGS-Bildungs GmbH

Oct-13

Jul-17

3.8

Secondary buyout

3.9

Romaco GmbH

Apr-11

Jun-17

6.2

Trade sale

2.4

FDG S.A.

Jun-10

Apr-17

6.8

Secondary buyout

2.4

Broetje

Mar-12

Oct-16

4.6

Trade sale

4.1

Clyde Bergemann Power Group

May-05

Apr-16

10.9

Trade sale

0.3

Spheros GmbH

Dec-11

Mar-16

4.3

Trade sale

2.5

Homag Group AG

Feb-07

Oct-14

7.7

IPO / Trade sale

2.8

Coveright Surfaces GmbH

Jun-03

Jan-13

9.6

Trade sale

1.2

ICTS Europe B.V.

Mar-08

Dec-12

4.8

Write off

0.0

Preh GmbH

Oct-03

Dec-12

9.2

Trade sale

3.1

Coperion GmbH

Jul-07

Nov-12

5.3

Trade sale

4.2

Heim & Haus GmbH

Sep-06

May-11

4.7

Buy back

1.9

MCE AG

Apr-07

Oct-09

2.5

Trade sale

4.1

Lewa GmbH

Sep-05

Aug-09

3.9

Trade sale

7.3

AkSys GmbH

Nov-01

Oct-08

6.9

Trade sale

0.1

DS Technologie GmbH

Jul-98

Oct-07

9.3

Trade sale

1.3

HT Engineering GmbH

Jun-02

Jun-06

4.0

Trade sale

6.2

Zapf GmbH

Nov-99

Apr-06

6.4

Trade sale

0.1

Otto Sauer Achsenfabrik

Apr-04

Mar-06

1.9

Secondary buyout

4.1

Babcock Borsig Service

Nov-03

Apr-05

1.4

Trade sale

5.8

Andritz AG

Dec-99

Aug-04

4.4

IPO

2.0

Edscha AG

Oct-00

Dec-02

2.2

Secondary buyout

1.8

Libro AG

Feb-97

Jul-01

3.4

Trade sale

1.6

Sebaldus GmbH

Aug-97

Nov-00

3.3

Trade sale

3.5

Euvita KG

Jul-97

Aug-00

3.1

Trade sale

0.9

GAH AG

Jul-98

Jul-00

2.0

Trade sale

3.7

Schoeller & Hoesch KG

May-97

Dec-98

1.6

Trade sale

2.6

Average

4.9

2.7

Source: DBAG. Note: *Does not include partial disposals. **Sjølund was sold for a symbolic price of one Danish krone.

Exhibit 3: DBAG’s growth financings realised between 1996 and end-September 2022

Company

Investment date

Divestment date

Holding period (years)

Exit route

Exit multiple (x)

DNS:NET Internet Service

Sep-13

Jun-21

7.8

Secondary buyout

5.8*

Rheinhold & Mahla

Sep-16

Mar-21

4.5

Trade sale

0.7

Inexio

May-13

Nov-19

6.5

Secondary buyout

7.6

Novopress

Jun-15

Jul-19

4.1

Repayment

15.7

PSS

Dec-12

Jan-19

6.1

Trade sale

0.5

Homag

Jan-97

Oct-14

17.8

Trade sale

3.4

Bauer

Sep-96

Jul-06

9.8

IPO

4.0

Schlott

Jan-00

Mar-05

5.2

Secondary placement

1.6

Hoermann

May-97

Oct-04

7.4

Repayment

2.5

Sauer

May-97

Apr-04

6.9

Repayment

1.9

HKL Baumachinen

Feb-95

Feb-04

9.0

Repayment

2.4

Rheinhold & Mahla

Dec-99

Sep-02

2.8

Trade sale

1.5

Hawe

Jan-97

Jun-02

5.4

Trade sale

2.6

AVK/SEG

Sep-96

Oct-01

5.1

Trade sale

1.5

Frosch Touristik

Feb-96

Dec-00

4.8

Trade sale

1.4

Palfinger

Nov-96

Jun-99

2.6

IPO

2.1

Average

6.6

2.9

Source: DBAG. Note: *Attributable to equity investment. Total exit multiple, including debt financing, amounted to 3.2x.

DBAG’s approach to ESG

DBAG has embedded sustainability aspects in its corporate governance and investment process, highlighting that this improves the alignment of shareholders’ and fund investors’ targets with DBAG’s objectives. At the same time, management highlights it must make a balanced assessment in its investment decisions between what is valued by society and what is economically advisable. DBAG documented the importance of ESG aspects in its business by signing the United Nations Principles for Responsible Investment (UN PRI) in September 2021 (it will issue its first UN PRI report in spring 2023).

To monitor and manage the ESG performance at DBAG and portfolio companies, it started to collect a set of general and business model specific ESG key performance indicators (KPIs) in FY21. These address key sustainability topics identified by management, including greenhouse gas emissions, occupational health and safety, employee satisfaction, gender parity and compliance. DBAG plans to integrate these ESG-based KPIs (covering a multi-year horizon) into the budget plans of its portfolio companies for FY23.

Moreover, DBAG recently enhanced its target system through the addition of ESG-related goals at the holding level from FY23. These include: CO2 footprint (scope 13, with scope 3 comprising business travel and commuting); employee satisfaction, as measured by the arithmetic mean of all values provided by its employees in a survey conducted using the TeamEcho software; and payments from compliance breaches. For FY23, management aims at a reduction of DBAG’s CO2 footprint to 2.4 tonnes per full-time equivalent from 2.5 tonnes in FY22 (with an FY25 ambition of 2.2 tonnes, see Exhibit 12). It also wants to improve employee satisfaction to 63% in FY23 from 62% in FY22 (aiming for 65% by FY25). The share of women within DBAG’s investment advisory team is currently at 14%, with further improvement targeted for the coming years. Finally, DBAG puts emphasis on zero tolerance for any form of corruption and other unethical business practices, and therefore wants to avoid any payments from compliance breaches. We also note that DBAG recently decided to support a local reforestation campaign launched for the Hesse state forest.

Current portfolio positioning

At end-September 2022, DBAG’s portfolio consisted of 39 companies with a total gross value of €567.3m (down 0.5% y-o-y). Around 50% of DBAG’s portfolio value was allocated to industries of its core expertise historically, that is industry/industrial technology and industrial services.

The recent new investments (see below), coupled with changes in carrying values of portfolio holdings, translated into a share of ‘growth’ sectors at c 45% of DBAG’s portfolio at end-September 2022, of which 21% is in IT services and software, 13% in broadband telecommunications and 11% in healthcare. This is broadly in line with the 46% at end-September 2021, as the increase in IT services and software and healthcare exposure offset the decline in the carrying value of broadband telecommunications companies (see Performance section for details). We believe that DBAG’s recent investments and current portfolio allocation to the software and services space illustrate DBAG’s intention to benefit from the digitalisation wave unfolding globally. According to a press release published by the research unit of German development bank KfW from October 2021, Germany needs to double, or even triple, its IT expenditure to reach a level as a percentage of GDP closer to other advanced economies.

Exhibit 4: DBAG’s portfolio exposure FY11–22

Source: DBAG, Edison Investment Research

Exhibit 5: DBAG’s investment portfolio at end-September 2022

Company

Headquarters

Core business

DBAG sector

2021
revenue

First inv’t

Type of inv’t

Co-inv’t fund

DBAG inv’t cost

Holdings of over five years – DBAG gross portfolio value €170.6m

Heytex

Bramsche, Germany

Manufacturer of textile print media and technical textiles

Core

€120m

Dec-12

MBO

DBAG Fund V

€6.5m

Telio

Hamburg, Germany

Developer, installer and operator of communications and media systems in prisons

Other

€82m

Apr-16

MBO

DBAG Fund VI

€4.7m

Silbitz

Thuringia, Germany

Iron foundries producing castings for wind energy systems, drive engineering and engine construction

Core

€137m

Aug-15

MBO

DBAG Fund VI

€6.2m

Pfaudler International Sàrl

Schwetzingen, Germany

Manufacturer of glass-lined reactors and components for the chemical and pharmaceutical industries

Core

US$327m

Dec-14

MBO

DBAG Fund VI

€1.2m

Oechsler AG

Ansbach, Germany

Developer, manufacturer of injection-moulded precision components principally for automotive suppliers

Core

€369m

Mar-15

Exp. capital

DBAG ECF

€11.2m

mageba AG

Bülach, Switzerland

Provider of structural bearings, expansion joints and other services for the infrastructure and buildings sectors

Core

CHF106m

Feb-16

Exp. capital

DBAG ECF

€7.5m

Gienanth

Eisenberg, Germany

Iron foundry producing castings for automotive suppliers, diesel and gas engine blocks

Core

€253m

Mar-15

MBO

DBAG Fund VI

€6.5m

JCK KG

Quakenbrück, Germany

Textile retail business, mainly for discounters

Other

€761m*

Jun-92

Exp. capital

DBAG ECF

€8.8m

Holdings of two to five years – DBAG gross portfolio value €175.1m

von Poll Immobilien GmbH

Frankfurt, Germany

Real estate agency

Other

€145m

Jul-18

MBO

DBAG ECF I

€3.9m

evidia

Unna, Germany

Regional provider of diagnostic and therapeutic radiology outpatient and inpatient care services

Growth

€172m

May-19

MBO

DBAG Fund VII

€16.3m

BTV Multimedia GmbH

Hannover, Germany

Manufacturer and full-service provider of cable and fibre-optic networks

Growth

€93m

Aug-18

MBO

DBAG ECF II

€10.5m

Cloudflight**

Munich, Germany

Advisory services, software development and cloud operations

Growth

€80m

Jun-19

MBO

DBAG Fund VII

€9.1m

Solvares (previously: FLS)

Heikendorf, Germany

Provider and developer of real-time route optimisation software

Growth

€23m

Oct-18

MBO

DBAG ECF II

€18.4m

Polytech

Dieburg, Germany

Development and production of silicone implants used in reconstructive and aesthetic plastic surgery

Growth

€55m

Oct-16

MBO

DBAG Fund VI

€15.2m

Frimo

Lotte, Germany

Developer and manufacturer of tooling and production plants for plastic components used in automotive applications

Core

€145m

Nov-16

MBO

DBAG Fund VI

€19.5m

Dieter Braun

Bayreuth, Germany

Supplier of cable assembly and lighting solutions to the automotive industry

Core

€77m

Jan-17

MBO

DBAG Fund VI

€6.3m

More than Meals

Luxembourg

Manufacturer of chilled meat products, prepared meals and snacks for private-label brands of large grocery chains

Other

€471m

Apr-17

MBO

DBAG Fund VII

€23.3m

Vitronet

Essen, Germany

Fibre-optic network services provider to the telecoms industry

Growth

€371m

Jun-17

MBO

DBAG ECF

€14.7m

Sero

Rohrbach, Germany

Development partner and manufacturing service provider for electronic components, with focus on the automotive sector

Core

€143m

Nov-18

MBO

DBAG Fund VII

€16.4m

duagon

Dietikon, Switzerland

Provider of network components for data communication in railway vehicles

Core

CHF104m

Jul-17

MBO

DBAG Fund VII

€26.8m

Kraft & Bauer

Holzgerlingen, Germany

Supplier of automated fire extinguishing systems for machine tools

Core

€23m

Nov-18

MBO

DBAG Fund VII

€14.1m

PM Flex

Bergamo, Italy

Production and marketing of cable protection conduits for electrical cables

Core

€139m

Sep-20

MBO

DBAG Fund VII

€11.2m

Hausheld

Mönchengladbach, Germany

Development of smart metering solutions for electricity networks

Core

€1m

Sep-20

Exp. capital

-

€11.6m

Fire

Kirchheim, Germany

Design, construction and maintenance of fire extinguishing systems in buildings

Core

€150m

Sep-20

MBO

DBAG Fund VIII

€8.0m

Deutsche Giga Access

Essen, Germany

Regional provider of fast internet and telephony services

Growth

€4m

Sep-20

MBO

DBAG Fund VIII

€9.1m

Cartonplast

Dietzenbach, Germany

Pool system for the rental of reusable plastic layer pads

Core

€91m

Nov-19

MBO

DBAG Fund VII

€25.3m

Netzkontor Nord GmbH

Flensburg, Germany

Regional provider of services for fibre-optic networks management

Growth

€58m

Jan-18

MBO

DBAG ECF I

€1.2m

Karl Eugen Fischer GmbH

Burgkunstadt, Germany

Leading manufacturer and developer of cutting systems for the tyre industry

Core

€53m

Jun-18

MBO

DBAG Fund VII

€22.6m

Holdings of one to two years – DBAG gross portfolio value €76.6m***

R+S

Fulda, Germany

Design, construction, and maintenance of electric, heating, ventilation and energy structures in buildings

Core

€244m

May-21

MBO

-

€15.8m

Operasan

Büren, Germany

Nephrology and dialysis treatments in cooperation with physicians

Growth

€13m

Jan-21

MBO

DBAG Fund VII

€7.9m

Congatec

Deggendorf, Germany

Computer-on-modules provider – the hardware deployed as a part of larger systems on site (on factory robots, ultrasonic devices etc to reduce latency)

Core

€134m

Oct-20

MBO

DBAG Fund VIII

€23.5m

Holdings of less than one year – DBAG gross portfolio value €143.0m***

Itelyum

Pieve Fissiraga/Lodi, Italy

Recycling of complex industrial waste

Core

€479m

Oct-21

Exp. capital

DBAG Fund VIII

€16.7m

Dantherm

Skive, Denmark

Heating, ventilation, and air conditioning products

Core

DKK1,369m

Nov-21

MBO

DBAG Fund VIII

€22.4m

akquinet

Hamburg, Germany

Customised development of software solutions, and ERP systems implementation

Growth

€139m

Jun-22

MBO

DBAG Fund VII

€5.2m

freiheit.com

Hamburg, Germany

Developer of extensive software platforms for digital business models

Growth

€30m

Dec-21

MBO

DBAG Fund VIII

€18.8m

vhf

Ammerbuch, Germany

CNC milling machines and tools for the dental, industrial and sign making sectors

Core

€46m

July-22

Exp. capital

N/A

€25.0m

MTWH

Castelli Calepio, Italy

Manufacturer of metal applications for the luxury goods industry

Core

€59m

Jun-22

MBO

DBAG Fund VIII

€14.6m

in-tech

Garching, Germany

Process consulting and software development for electronics in vehicles, in industrial plants and in transport systems

Growth

€115m

Mar-22

MBO

DBAG Fund VIII

€15.4m

Green Datahub

Hamburg, Germany

Data centres

Growth

€4m

Jun-22

MBO

N/A

€24.9m

Buyout funds, over five years – DBAG gross portfolio value €0.4m 

DBG Eastern Europe II

Jersey, Channel Islands

One investment remaining in portfolio

Other

N/A

Jan-03

Buyout fund

N/A

€0.1m

Source: DBAG. Note: *Last reported revenues of FY20. **Partial disposal after the reporting date. ***Edison calculations.

A significant pick-up in investment activity in FY22

DBAG exhibited a high level of investment activity in FY22, investing €176.8m in total (25% of opening NAV) compared to an FY17–21 average of €76.5m (18% of opening NAV, see exhibit on the front page). This includes four MBOs announced and completed in FY22, three of which (akquinet, freiheit.com and in-tech) are from the IT software and services sector. Akquinet specialises in the implementation of ERP systems (SAP and Microsoft) and the customised development of software solutions, with expertise across the health and social welfare sectors, as well as mechanical and plant engineering, the public sector and logistics. It also provides IT outsourcing services for both small and large businesses. Freiheit.com specialises in the implementation of complex digital transformation projects for large and mid-sized companies, including for example Daimler, METRO andr Tchibo. In-tech offers technological and process consulting, engineering services and software development, with c 90% of sales derived from development services for the automotive and automotive supply industries. The fourth buyout was the investment in MTW Holding, an Italy-based designer and producer of high-quality metal accessories for luxury fashion brands, such as belt buckles, clasps or fittings for handbags, shoes and clothing, as well as jewellery and emblems. DBAG also completed two MBOs agreed in the previous financial year: Dantherm (a provider of heating, cooling, drying, ventilation and air cleaning technology) and Itelyum (specialising in the recycling of complex industrial waste). Importantly, four of the companies acquired in the calendar year 2022 were bought from families/founders, illustrating in our view DBAG’s distinct advantage in terms of deal sourcing.

DBAG also completed two new long-term investments: Green Datahub (consisting of two data centres) and vhf (a developer and producer of CNC milling machines and tools for the dental, industrial and sign making sectors). DBAG’s portfolio companies remained active in terms of add-on acquisitions with 28 transactions carried out across DBAG’s portfolio in FY22 (of which 26 completed and two are agreed but yet to be closed).

Exits modest in FY22, but Cloudflight sale agreed in November

DBAG generated a moderate €30.6m in realisation proceeds stemming from two partial disposals (Telio, GMM Pfaudler) and one refinancing (von Poll Immobilien). DBAG also sold Sjølund (a producer of bent aluminium and steel components acquired in January 2018) for a negligible amount in FY22. After the reporting date, in November 2022 DBAG agreed to sell Cloudflight (a full-service provider for industrial digital transformation) to Partners Group (which acted on behalf of its clients) – see details above.

Liquidity: Reduced dividend to foster capital preservation

DBAG’s liquidity has worsened over FY22 to €84.8m of available liquid resources (of which €19.2m in cash and €65.7m in the undrawn part of its credit facility) from €219.5m at end-FY21 (€112.8m in cash and liquid securities, and fully undrawn credit facility of €106.7m). DBAG will receive c €45m proceeds from the recently agreed disposal of Cloudflight (expected to be closed within four months from deal announcement), although part of it will be reinvested in a c 3% stake in the company (out of up to 15% in total to be provided jointly by DBAG and DBAG Fund VII); the transaction should meaningfully improve the company’s liquidity.

We expect DBAG’s exit activity in the coming months to be rather limited. Firstly, it has a relatively young portfolio, of which 39% by fair value was acquired less than two years ago (and 31% was acquired two to five years ago). Secondly, DBAG’s industrial portfolio (despite being quite mature) continues to be affected by macro headwinds and is held at 1.1x acquisition costs on average, below DBAG’s target returns. This means DBAG is less likely to sell any of the industrial holdings soon, unless it accepts a below-average return to free up capital for new, more compelling investments. For instance, DBAG could decide to sell one of the assets held beyond the usual investment horizon in older DBAG fund vintages (eg DBAG Fund V now holds only one investment acquired in 2012). Finally, deal activity across the global PE market slowed significantly in recent months, mostly due to an uncertain macroeconomic outlook (which makes the pricing of new deals more difficult), as well as lower debt availability (see the ‘Market outlook’ section for details). Having said that, as DBAG’s portfolio is diversified (39 companies), it may still be able to exit some of its holdings in the coming quarters.

DBAG’s net operating expenses (€40.2m in FY22) are more than covered (or at least largely covered) by its fund services income (€43.2m in FY22). Consequently, DBAG can spend the above-mentioned liquid resources on (1) new investments, (2) follow-on investments in existing holdings (to fund add-ons or to support companies in distress) and (3) dividend payments. DBAG’s outstanding commitments to invest alongside its funds stood at €199.3m at end-September 2022 and its mid-term planning from November 2022 assumes new investments (both alongside DBAG funds and in long-term investments entirely from DBAG’s balance sheet) of €96m pa on average in FY23–25 (vs €114m for 2022–24 based on November 2021 planning). Consequently, DBAG’s liquid resources covered 43% of its outstanding commitments at end-September 2022, or 36% if we include DBAG’s commitments to DBAG ECF IV as of the fund’s first close (see Exhibit 6).

Exhibit 6: DBAG’s commitments coverage ratio

Source: DBAG, Edison Investment Research. Note: *Including commitments to DBAG ECF IV based on DBAG’s co-investment agreement with the fund (49% of total commitments, no more than 100m) and the 72m commitments accepted from third-party investors during the fund’s first close.

We note that DBAG’s outstanding commitments will be drawn gradually over several years, given that they are mostly related to DBAG Fund VIII (DBAG’s only buyout fund still in investment phase, which ends in 2026) and DBAG ECF IV. Moreover, given the strong investment activity in FY22 and the recent decline in new investment opportunities (see above), DBAG’s capital calls from its funds to finance new buyouts could slow down in the coming months. Beside new MBOs and long-term investments, the pace of DBAG’s capital deployment will be also determined by its support for companies with liquidity challenges (management does not expect liquidity injections in the current economic cycle to meaningfully exceed the c €15m it provided in 2020 amid the COVID-19 outbreak), as well as DBAG’s funding of add-ons across the portfolio (as a broad reference point, DBAG provided €11m to its portfolio companies in FY22).

The above considerations, coupled with the capital markets environment and the aim to maintain a sustainable dividend payout ratio, resulted in a board recommendation of a dividend of €0.80 per share for FY22 (or c €15m), compared with €1.60 per share in FY21. However, management, in its FY22 results commentary, stated a medium-term FY23–25 target dividend of €1.60 per share.

Performance: Drag from public markets and macro environment

DBAG reported a net loss of €97.6m in FY22 (ended September 2022), broadly in line with the preliminary figures published on 20 October. Its loss from private equity investments of €111.3m largely reflects negative revaluation effects (see below for details), partially offset by a reduction in accrual for carried interest (€28.3m). This translated into a decline in net asset value per share of c 13% in total return terms in FY22. This compares to a total return of SDAX (the German small-cap index) of -36%, though we note that DBAG (similar to other listed PE companies) does not consider public equity indices as a formal benchmark and that its assessment of private equity valuations are not exclusively determined by the changes in listed peer multiples.

Meanwhile, its fund services segment delivered a €15.4m profit, in line with management guidance of €14–16m. This implies a c 15% y-o-y decrease, which reflects one-off expenses associated with the departure of DBAG’s CFO (€2.0m), as well as team expansion (DBAG’s headcount increased to 89 from 77 a year ago) and higher consultancy expenses. Income from fund services increased slightly by 2.0% y-o-y to €44.3m as increasing fees from DBAG Funds VII and VIII were offset by lower fees from DBAG Fund VI and DBAG ECF (as expected), as new investments of top-up funds increase the fee-earning assets, while funds in the divestment phase reduce their assets under management (AUM) through disposals.

Exhibit 7: Income statement by segment (€m)

FY22

FY21

y-o-y

Net income from investment activity

(98.9)

178.4

N/A

Other income/expenses

(12.4)

(10.7)

16%

PE investments pre-tax profit

(111.3)

167.7

N/A

Fund services income

44.3

43.4

2%

Other income/(expenses)

(28.9)

(25.4)

14%

Fund services profit pre-tax

15.4

18.0

(15%)

Consolidated net profit/(loss)

(97.6)

185.1

N/A

Source: DBAG

Exhibit 8: DBAG’s fund services segment results (€m)

Source: DBAG, Edison Investment Research

DBAG’s five-year and 10-year NAV total return (TR) to end-September 2022 stood at 6.0% and 12.1% pa, respectively (vs SDAX’s -2.4% and 9.1% pa, respectively). Apart from the FY22 loss (largely driven by the derating of broadband telecom holdings, see below), this also reflects the impact on its industrial holdings from the economic slowdown both in the period leading to the outbreak of COVID-19 and during the pandemic (see below for details).

Exhibit 9: DBAG performance to 30 September 2022

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 10: DBAG’s NAV per share development in FY22

Source: DBAG, Edison Investment Research

Broadband telecom the main negative contributor in FY22

We note the particularly significant decline in the value of broadband/telecom investments (coming from a combination of lower multiples, as well as weaker earnings in some cases), with this sector contributing €77.7m to the €98.9m negative net income of the PE investments segment. As a result, their share of the total portfolio value fell from 30% at end-FY21 to 13% at end-FY22 (despite only one partial exit from Telio carried out within this sector in FY22). Alongside new investments (recognised initially at acquisition cost), this was one of the main drivers behind the decline in average multiple of acquisition cost from 2.80x at end-FY21 to 1.33x at end-FY22. Meanwhile, DBAG’s industrial sectors have been revalued upwards, with the average multiple increasing from 0.9x at end-FY21 to 1.1x at end-FY22.

Valuations down due to multiples, positive earnings effect offset by changes in debt

Overall, the €144.4m downward revaluation of DBAG’s total portfolio in FY22 (from €545.3m) was primarily driven by lower peer multiples across sectors (€150.8m impact). Most of DBAG’s portfolio is valued using the multiples method (29 out of 39 equity investments), normally based on forecast EBITDA and debt for FY22 (though in some cases based on earnings likely to be generated over the long term). Following DBAG’s strong new investment activity in FY22, eight holdings (making up 25.6% of portfolio value) are recognised at acquisition cost, and the total portfolio value increased by 1.5% to €553.3m.

Against the deteriorating macroeconomic conditions and near-term outlook, earnings growth made a positive contribution to DBAG’s portfolio value of €80.7m in FY22, especially in the industry/industrial technology and IT services & software sectors. This was driven by the recognition of higher earnings likely to be generated over the long term, as well as add-ons (which are valued at the platform’s multiple immediately after acquisition).

Having said that, the positive earnings effect in FY22 was almost fully offset by the increase in debt at the portfolio companies’ level (€78.6m), of which 45% was to finance add-ons. At end-September 2022, 58% of DBAG’s portfolio value was attributable to companies with a net debt to EBITDA of more than 4.0x, which represents a significant increase from the 17% at end-September 2021. A further 11% had a ratio of 3.0–4.0x, versus 47% at end-September 2021, suggesting that some portfolio holdings moved from this bucket to the >4.0x group. In this context, we note the recent increase in three-month Euribor from c -0.5% in March 2022 to c 2.1% currently. While some of the holdings with a higher leverage are likely companies from the more resilient ‘growth’ sectors (especially those that performed more add-ons recently), part of the increase in average leverage across the portfolio is likely also due to higher working capital funding requirements and a pressure on margins experienced by some industrial holdings caused by cost inflation, supply chain disruptions and project delays coupled with deteriorating economic conditions. DBAG disclosed that the top five companies in terms of exposure to supply chain issues represented 16% of DBAG’s portfolio value at end-September 2022.

Exhibit 11: Net gains and losses on portfolio measurement and derecognition (€m)

FY22

FY21

Change in fair value of unlisted investments

(144.4)

161.0

Change in earnings

80.7

148.0

Change in debt

(78.6)

(73.7)

Change in multiples used in valuation

(150.8)

85.6

Change in exchange rates

2.0

(0.2)

Change, other

2.3

1.4

Net result of disposals

14.9

41.3

Other

(0.5)

0.4

Total

(130.0)

202.7

Source: DBAG

FY23 guidance: Improved portfolio trading despite macroeconomic headwinds

DBAG’s management expects supply chain issues to ease somewhat, though it expects that its manufacturing companies will remain negatively affected in 2023. Management also admitted that, while some portfolio companies have been quite successful in passing on cost inflation to customers, others have been slower to do so than DBAG originally expected. Still, management believes that measures introduced so far across the portfolio should assist DBAG’s overall portfolio performance, which is reflected in its FY23 NAV guidance (published alongside annual results) of €605–675m and pre-tax profit forecast of the PE investments segment of €60–70m. When adjusted for the €0.80 dividend per share (as per management’s proposal), this implies an NAV TR of 7–19% in FY23. We note that management guidance is based on end-September 2022 valuation multiplies and that the public equity markets have rebounded since then (the SDAX is up c 12% so far in the final quarter of the current calendar year).

DBAG’s management expects fund services earnings to reach €13–15m in FY23 (ie somewhat below or in line with FY22). Its FY25 ambition assumes €9–11m, though we note that this is because DBAG assumed that the investment phase of a new buyout fund (DBAG Fund VIII’s successor) will start at some point during FY25, while expenses associated with setting up and running the fund would be incurred from the beginning of the financial year. However, the exact date for launching a fund is obviously difficult to predict a few years in advance.

Exhibit 12: DBAG’s FY23 forecast and updated ambition FY25

 

FY22 actual

FY23 forecast

Ambition 2025

Financial performance indicators

NAV (€m)

579.5

605–675

790–875

Fund services profit (€m)

15.4

1315

9–11

PE investments profit (€m)

(111.3)

60–70

120–140

Non-financial performance indicators

CO2 footprint (t CO2/FTE)

2.5

2.4

2.2

Employee satisfaction (%)

62

63

65

Payments from compliance breaches (€)

0

0

0

Other indicators

Net income (€m)

(97.6)

70–80

130–145

Source: DBAG data

Dividends: Cut to €0.80 per share to preserve capital

DBAG distributes dividends once a year, with a stable or rising (whenever possible) DPS policy. The dividend per share increased steadily over FY16–21 (except for the COVID-19 year) and remained stable in FY22. However, in light of the reduced liquidity (see above) following the high level of investment activity throughout FY22, as well as fewer than expected exits from the industrial portfolio (amid macroeconomic headwinds), DBAG’s management board has proposed an €0.80 payment for FY22. DBAG plans to resume its dividend policy next year, targeting a payout of no less than €1.60 per share in the midterm (FY23–25). We understand that in the near term, this will be dependent on a normalisation of the exit environment and DBAG’s investment pace.

Exhibit 13: Dividend history since FY16

Source: DBAG, Edison Investment Research; Note: *Management board proposal. **Management guidance.

Valuation

DBAG’s NAV basically reflects its PE investments portfolio. Having said that, DBAG manages fee-generating third-party assets of c €1.9bn (AUM including DBAG’s investment portfolio at end-September 2022 was €2.5bn). DBAG’s shares historically normally trade at a premium to NAV (five-year average of 10%), which we believe reflects the market-implied value of the fund services segment (Exhibit 14). Given the recent strong decrease in DBAG’s share price (32% since end-2021, reflecting a broader trend in the listed PE space) it currently trades at an unusual 17% discount to NAV, still narrower than most peers despite the NAV underperformance.

Exhibit 14: Share price premium (discount) to NAV over five years (%)

Source: Refinitiv, Edison Investment Research

We estimate 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 (12.9x FY23 P/E multiple); and (2) using the implied value of the fund services segment, assuming the PE investments are valued in line with peers. As 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 as presented in Exhibit 15 below, excluding 3i (which also manages third-party capital and generates fee income).

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

Exhibit 15: Analysis of DBAG’s market value by segment 

Fund services in line with peers 

 

Earnings multiple applied to fund services segment’s valuation 

12.9x 

Implied value of fund services segment*

€180.6m 

Implied value of private equity investments segment 

€300.8m 

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

48% 

Private equity investments in line with peers 

 

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

30.7% 

Implied value of private equity investments segment 

€401.6m 

Implied value of fund services segment  

€79.8m 

Implied FY23e earnings multiple of fund services segment* 

5.7x 

Source: DBAG, Edison Investment Research. *Based on the mid-point of management guidance.

Given the higher visibility in terms of income generation in the asset management business, valuation multiples in the sector were less volatile in recent months than the market valuations of listed private equity investment companies. Assuming the fund services segment is valued in line with peers (ie at a 12.9x FY23e earnings multiple), the implied value of PE investments is €301m (ie 48% below its end-September NAV), while DBAG’s peers currently trade at a 31% discount (see Exhibit 16, excluding 3i).

The wider discount may be at least partially justified by DBAG’s high exposure to the German industrials sector, which has been experiencing market headwinds for a prolonged time, even before the pandemic. It now faces significant challenges related to a weakening macroeconomic outlook (see above). We believe that this is an important factor behind DBAG’s NAV underperformance versus its peers. As at end-September 2022, 50% of DBAG’s portfolio is still allocated to industry/industrial technology and industrial services sectors (overall, companies from DBAG’s ‘core’ sectors are currently valued at 1.1x acquisition cost). Improving M&A activity, earnings prospects and investor sentiment could trigger a narrowing of the discount.

DBAG’s dividend yield based on payments in the last 12 months stands at 6.3% and is the highest among peers. Having said that, DBAG decided to recommend a lower DPS to be paid from FY22 profits (see above) to secure liquidity in the current environment, which now implies a 3.1% yield, which is in line with peers. However, we note that some peers may decide to take a similar approach, as illustrated by Princess Private Equity recently suspending its second interim dividend from FY22 profits (see our note and podcast for details). DBAG intends to return to €1.6 DPS in the medium term (2023–25).

Exhibit 16: Listed PE investment companies peer group at 15 December 2022*

% 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

428

(11.4)

13.9

32.9

190.3**

(38.7)

(29.2)

(42.5)

89.5

(15.3)

6.3

3i

Global

13,008

32.6

89.4

175.0

717.8

(11.3)

4.5

43.1

614.0

(9.5)

2.0

GIMV

Global

1,039

(0.7)

1.5

19.0

107.0

(15.8)

(13.1)

(0.7)

90.7

(8.0)

5.9

HgCapital Trust

UK

1,620

9.1

87.3

170.9

386.7

(11.4)

56.9

131.8

348.3

(20.9)

1.4

ICG Enterprise Trust

UK

808

23.5

66.2

117.3

285.5

(13.6)

23.3

51.2

222.1

(36.3)

1.9

Oakley Capital Investments

Europe

739

42.7

104.4

190.7

293.5

7.1

75.2

156.5

234.2

(36.0)

0.5

Princess Private Equity

Global

529

(2.4)

32.2

63.9

201.1

(15.3)

27.2

34.1

228.6

(38.5)

4.3

abrdn Private Equity Opp’s

Europe

637

21.6

80.4

125.1

322.2

(15.1)

30.0

45.5

246.2

(44.6)

3.4

Average

2,626

18.1

65.9

123.1

330.6

(10.8)

29.1

65.9

283.4

(27.7)

2.8

Rank

8

8

7

7

7

8

8

8

8

3

1

Source: Morningstar, Edison Investment Research. Note: *12-month NAV performance in sterling terms based on end-September 2022 ex-par NAV, or latest earlier available ex-par NAV (end-July for ICG Enterprise Trust, end June for Oakley Capital Investments). **Last available NAV at the beginning of the 10-year period was end-October 2012 for DBAG due to reporting period change during the period.

Fund profile: PE investor and manager

Deutsche Beteiligungs is a Germany based and listed PE investment and fund management company founded in 1965. It invests in mid-sized companies in German-speaking countries (the DACH region) and selected other European regions (eg Northern Italy), focusing on growth-driven profitable businesses valued at €50–250m. DBAG also initiates and manages closed-end PE funds (generating stable recurring fee income) with current third-party capital under management of €1.9bn. The DBAG funds carry out MBO transactions to acquire a majority equity stake for 40–220m, with DBAG acting as a co-investor. DBAG also makes long-term investments funded exclusively from its own balance sheet where the company normally targets a ticket size of 15–35m with a holding period of seven years and longer (compared to up to five years in MBOs). Here, DBAG focuses either on providing growth financing to family-owned businesses in exchange for a minority stake or on acquiring majority stakes in companies with performance-driven equity requirements, including corporate spin-offs. DBAG also manages funds focused on growth financing (Expansion Capital Funds, ECFs). The DBAG ECF funds I, II and III have completed their investment period and currently manage a minor part of DBAG’s AUM. After the reporting date, DBAG successfully launched DBAG ECF IV, accepting €72m commitments from investors at its first close. DBAG entered into a co-investment agreement with the fund amounting to 49% of total commitments, but no more than €100m. The company has been a ‘partner of choice’ for a number of German private businesses, in particular those owned by founders and their family members, as illustrated by the share of businesses sold by this group to DBAG and included in its total MBO volume in 2012–21 at 57% compared to 46% for the broader German mid-market MBOs segment.

DBAG is managed internally and has an investment team consisting of 37 employees (up from 28 a year earlier) including 14 senior members who have been with DBAG for 18 years on average. The alignment of the team’s interests with DBAG and fund investors is supported by co-investments made alongside the DBAG funds by senior members (currently 21 individuals) at c 1–2% of capital raised (the volume of these co-investments stood at €24.6m at end-September 2022). They are entitled to a share in profit (carried interest) at 20% of proceeds from sales over the investors’ preferred return of 8% pa. Members of the investment team also receive a variable remuneration based on the success of DBAG’s long-term investments. The investment team is supported by an extensive external network of 82 experienced industrial partners and senior advisors.

DBAG is a self-managed entity and therefore does not incur any expenses related to external fees and charges. While the operating expenses translate into c 1.4% of the AUM (FY20–22 average), they are fully covered by the fee income collected from the managed funds (fees include management, transaction and incentive fees). As a result, the net expense ratio is actually a profit and amounted to 0.2% of AUM on average in FY20–22.

Capital structure

As at end-September 2022 DBAG’s share capital consisted of 18.8m ordinary shares of no par value. DBAG shares are predominantly owned by family offices (38%) and individual shareholders (36%).

Exhibit 17: Major shareholders

Exhibit 18: Shareholders by type

Source: Refinitiv, as at 7 December 2022

Source: DBAG, as at 30 September 2022

Exhibit 17: Major shareholders

Source: Refinitiv, as at 7 December 2022

Exhibit 18: Shareholders by type

Source: DBAG, as at 30 September 2022

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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 2022 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

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

General disclaimer and copyright

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.

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 2022 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

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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