Deutsche Beteiligungs — Solid exits in FY23, expanding into private debt

Deutsche Beteiligungs (FRA: DBAN)

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Deutsche Beteiligungs — Solid exits in FY23, expanding into private debt

Deutsche Beteiligungs (DBAG) posted a strong 18.1% NAV TR in FY23 (to end-September 2023), which more than offset the NAV TR loss in FY22 of c 13%. Its performance benefited from, among other factors, comparable multiples expansion and a successful year in terms of realisations (in contrast to the muted exit activity across the broad global PE market). Moreover, DBAG’s management decided to enter the fast-growing private debt market through the acquisition of a majority stake in ELF Capital, with DBAG making a €100m investment commitment to ELF Capital’s funds. We believe this may have contributed to the recent update to DBAG’s distribution policy, which now assumes a minimum dividend of €1.00/share versus the previous 2023–25 management target of €1.60/share.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Deutsche Beteiligungs_resized

Investment Companies

Deutsche Beteiligungs

Solid exits in FY23, expanding into private debt

Investment companies
Private equity

14 December 2023

Price

€27.25

Market cap

€512.4m

NAV*

€669.4m

NAV per share*

€35.59

Discount to NAV

23.4%

*As at end-September 2023.

Yield

2.9%

Shares in issue

18.8m

Code/ISIN

DBAN/DE000A1TNUT7

Primary exchange

Frankfurt

52-week high/low

€33.40

€25.60

€36.04

€30.81

Gearing

Net gearing at end-FY23

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. It also manages c €2bn of third-party capital, which generates stable recurring fee income. Following the acquisition of a majority stake in ELF Capital, DBAG will expand its offer to include private debt.

Bull points

Solid long-term track record, with average MBO and growth financings exit multiples of 2.7x and 2.9x, respectively, as at end-FY23.

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

Recurring cash flow from fund services.

Bear points

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

Interest rate normalisation may reduce prospective private equity returns, put pressure on interest coverage ratios and/or lead to refinancing issues across private equity-backed companies in the medium term.

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

Analyst

Milosz Papst

+44 (0)20 3077 5700

Deutsche Beteiligungs is a research client of Edison Investment Research Limited

Deutsche Beteiligungs (DBAG) posted a strong 18.1% NAV TR in FY23 (to end-September 2023), which more than offset the NAV TR loss in FY22 of c 13%. Its performance benefited from, among other factors, comparable multiples expansion and a successful year in terms of realisations (in contrast to the muted exit activity across the broad global PE market). Moreover, DBAG’s management decided to enter the fast-growing private debt market through the acquisition of a majority stake in ELF Capital, with DBAG making a €100m investment commitment to ELF Capital’s funds. We believe this may have contributed to the recent update to DBAG’s distribution policy, which now assumes a minimum dividend of €1.00/share versus the previous 2023–25 management target of €1.60/share.

DBAG’s NAV and share price total returns versus SDAX (rebased)

Source: DBAG, Refinitiv, Edison Investment Research

Mid-market private equity remains attractive

While interest rate normalisation may somewhat dilute gross internal rates of return across the PE sector, we note that the industry puts a greater emphasis on driving operational change (based on in-house value creation teams) and value-accretive, bolt-on M&A activity rather than pure financial engineering. In particular, the PE mid-market (which DBAG focuses on) offers several potential advantages: (1) many of the acquired companies have not been owned by PE before, potentially providing an opportunity for value creation; (2) portfolio exits are less dependent on the IPO market (DBAG rarely uses IPO as an exit route and two-thirds of its exits are to trade buyers); and (3) deals are less reliant on funding via syndicated loans (which has been muted recently) and also often involve less leverage versus large/mega buyouts.

An experienced player in the German PE mid-market

DBAG is a well-established investor and asset manager in the 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-September 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 set of sectors more strongly for several years now, with significant exposure to so-called ‘growth’ areas, including IT services and software (22% of end-September 2023 portfolio value), broadband/telecom (11%) and healthcare (9%).

DBAG’s value proposition

Offering private market investment gains and fee income in the DACH region and beyond

DBAG operates a unique business model as an investor and asset manager focused on the PE mid-market in the DACH region (Germany in particular) and neighbouring countries. It operates 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. It had c €2.5bn in assets under management and advisory at end-September, of which c €1.9bn was from 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.

The pre-tax profit of the fund services segment more than covered the operating expenses of DBAG’s PE investments segment (they stood at €14.0m and €12.8m in FY23, respectively), see Exhibit 1. DBAG’s management guides to FY24 funds services profit of €9–13m, somewhat below FY23 given that DBAG Funds VI and VII are in their disinvestment phase. It then guides to a pick-up to c €11–16m by FY26 upon the launch of the new buyout fund (DBAG Fund VIII’s successor), which is likely in 2025.

Exhibit 1: DBAG’s fund services profit more than covers the operating expenses of the PE investment segment

Source: DBAG

Focus on well-established, promising mid-market plays

DBAG invests in companies with proven business models, rather than early-stage businesses or companies requiring restructuring/distressed assets. 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. Importantly, DBAG focuses on the PE mid-market, which we believe offers several potential advantages, especially in the current environment (see our comment above for details). The partnership with ELF Capital allows DBAG to further expand its deal origination and investor network.

Historically, DBAG’s portfolio largely reflected the German industrial mid-market, with industrial businesses making up c 80% of its portfolio in FY15. Since then, DBAG has consistently increased its exposure to other sectors like IT services and software (22% of end-September 2023 portfolio value), broadband & telecommunications (11%), and healthcare (9%). These provided a cushion against the macroeconomic headwinds that have been affecting DBAG’s industrial portfolio since 2019. The share of these so-called ‘growth’ sectors declined slightly in FY23 from 45% in FY22, which reflects the re-rating of the industrial portfolio, as well as successful disposals of ‘growth’ businesses.

The recent Avrio Energie, TBD and NOKERA acquisitions (as well as some earlier investments, eg Itelyum, which specialises in recycling of complex industrial waste) illustrate DBAG’s shift within its industrials portfolio (including industrial technology and services) 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). We note that among DBAG’s top 15 holdings (making up c 70% of portfolio value at end-September 2023), there are only two companies with significant exposure to the automotive sector (Karl Eugen Fischer and Oechsler). Some of the other industrial holdings in the top 15 bucket are Cartonplast (a provider of a pool system for the rental of reusable plastic layer pads), Congatec (an industrial technology company focused on high-performance embedded computer products), Dantherm (a provider of heating, cooling, drying, ventilation and air cleaning technology) and Duagon (a provider of network components for data communication in railway vehicles).

Exhibit 2: DBAG’s portfolio has expanded in recent years into so-called growth sectors

Source: DBAG

An active ‘buy-and-build’ player and go-to partner for families and founders

DBAG may be considered one of the preferred PE partners for private company owners, especially families and founders, across Germany and neighbouring countries (eg Italy). This is underpinned by DBAG’s deep understanding of the mid-market in the DACH region and the industries it invests in. It is illustrated by the fact that 58% of all DBAG’s management buyout (MBO) investments in 2013–22 were businesses acquired from families and founders, compared to 53% for all German mid-market MBOs, see Exhibits 3 and 4.

Exhibit 3: Sellers of DBAG’s MBOs between 2013 and 2022

Exhibit 4: Sellers of German mid-market MBOs between 2013 and 2022

Source: DBAG

Source: DBAG

Exhibit 3: Sellers of DBAG’s MBOs between 2013 and 2022

Source: DBAG

Exhibit 4: Sellers of German mid-market MBOs between 2013 and 2022

Source: DBAG

DBAG is managed internally and has an investment team consisting of 33, including 21 senior members who have an average PE experience of 17 years. 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 at c 1–2% of capital raised (the volume of these co-investments stood at €17.3m at end-September 2023). 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 84 experienced industrial partners and senior advisors (as at May 2023).

DBAG’s team is actively engaged in the development of its portfolio companies, both organically and through targeted M&A. In the last eight years, DBAG carried out 101 bolt-on acquisitions across its portfolio, of which 10 were in FY23 (with another two agreed during the last financial year). DBAG’s buy-and-build strategy and expertise is illustrated for instance by its investment in Cloudflight, a full-service provider for industrial digital transformation. The partial sale of the company was agreed in November 2022 (DBAG retained a minority stake) after a holding period of around three years, with DBAG achieving a multiple on invested capital (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.

ELF Capital partnership adds attractive asset class to the mix

DBAG’s structuring options range from traditional MBOs of majority stakes (with an equity investment of €40–220m), through smaller buyouts (with an initial ticket size of €10–40m), long-term investments executed entirely from DBAG’s own balance sheet, up to private debt investments (see Exhibit 5). Management expects more investment opportunities to arise in equity minority positions in companies seeking reliable long-term financing. DBAG executes these investments primarily through its own balance sheet, though some investments of the DBAG Expansion Capital Fund (ECF) may also be structured as minority investments.

Exhibit 5: DBAG’s structuring options

Private debt

Management buyouts (MBOs)

Long-term investments

Small management buyouts (ECF*)

Focus on market-leading, profitable businesses in the DACH region; mostly owner-led

MBO's alongside DBAG Funds

Investments exclusively using DBAG's own financial resources

Small- and mid-market management buyouts

Credit investment of €10–50m

Equity investment of €40–220m

Equity investment of €15–35m

Initial equity ticket at €10–40m, up to €60m with follow-on capital increases (eg for add-on acquisitions)

Senior and flexible debt structures

Mainly acquisition of majority stakes

Mainly investments in family-owned businesses to support growth or change of ownership

Mainly acquisition of majority stakes (minority structures in exceptional cases); MBOs/carveouts, capital increases

Holding period up to 5–7 years

Holding period of up to five years

Holding period above seven years

Source: DBAG. Note: *ECF – DBAG’s Expansion Capital Funds.

Exhibit 6: DBAG’s portfolio split by type of investment at end-September 2023

Source: DBAG

In September 2023, DBAG announced its entry into the private debt segment via a strategic partnership with ELF Capital, a manager of credit funds that was spun off from ESO Capital’s German direct lending platform. DBAG will acquire a majority stake in ELF Capital Group, with a gradual increase to 100% over the next five years. The group includes ELF Capital Advisory, a private debt asset manager with c €200m of assets under management at present in two credit funds. Its flagship fund focuses on straight, senior-secured private debt (targeting a return of c 78% pa), while its Credit Solutions Fund has a more flexible mandate covering highly structured investments, including hybrid capital/structured equity investments, with an expected return of 1416% pa.

DBAG’s management highlighted that the present value of its initial investment in ELF Capital amounts to €12.2m, while the purchase price of the entire 100% stake depends on the ELF Capital Group’s further business development. Moreover, DBAG plans to co-invest c €100m in ELF Capital funds as a limited partner (LP), which will be a similar approach to its co-investments alongside DBAG funds. This compares with DBAG’s total co-investment commitments to DBAG funds of €244.0m at end-September 2023 and DBAG’s end-September 2023 NAV of €669.4m. The partnership allows DBAG to expand the financial solutions offered to German SMEs and gain exposure to an attractive, fast-growing private debt asset class via co-investments and fee income. It is worth noting that DBAG does not plan to tap into ELF Capital’s debt funding for its PE transactions.

DBAG is trading at a wide c 23% discount to NAV

DBAG posted a strong NAV total return (TR) of 18.1% in FY23, allowing it to more than recoup the FY22 NAV TR loss and post a five-year return of 8.6% pa, compared to 1.7% pa for SDAX, the German small-cap index (see exhibit on page 1). Meanwhile, DBAG’s share price rebounded from the end-September 2022 trough by a strong c 50% to end-September 2023, though it has given up some of the gains lately. The recent share price weakness may have been due to (1) the change to DBAG’s dividend policy announced on 20 November (see below for details) and (2) DBAG’s deletion from the MSCI Global Small Cap indexes as part of index constituent changes as of end-November 2023. As a result, DBAG’s shares now trade at a 23.4% discount to NAV, while they normally traded at a premium pre-2022 (see Exhibit 7). We believe that DBAG’s share price accounts for both the value of DBAG’s PE investment business (reflected in its reported NAV) and the value of the fund services business (not included in DBAG’s reported NAV).

Exhibit 7: DBAG’s historical discount/premium to NAV

Source: DBAG, Refinitiv

DBAG’s FY23 performance was assisted by a €121.0m positive impact from an increase in comparable multiples used to value the portfolio (including the revaluation of R+S based on the agreed disposal price), see Exhibit 8. This was further supported by €63.0m of net disposal gains, mostly related to the partial exits from Cloudflight and GMM Pfaudler, as well as full disposals of BTV Multimedia and Pmflex. The operating performance of the portfolio had a net €20.1m negative effect, as the positive contribution from earnings (mostly in IT services and software, broadband telecommunication and industrial services) was offset by an increase in debt, mainly to fund add-on acquisitions. The share of DBAG’s portfolio companies with a net debt to EBITDA multiple of 3.0x or more increased to 74% at end-September 2023 (54% with net debt to EBITDA of 4.0x or more) from 69% at end-September 2022. The pre-tax profit of DBAG’s PE investments segment reached €96.8m in FY23 (vs a €111.3m loss in FY22).

Exhibit 8: DBAG’s gross gains/(losses) on measurement and disposal portfolio by sources

€m

FY23

FY22

Changes in fair value of unlisted investments

51.6

(145.0)

Change in earnings

39.4

80.7

Change in debt

(59.4)

(78.6)

Change in multiples

121.0

(150.8)

Change in exchange rates

(6.6)

2.0

Other

(42.7)

1.8

Net result of disposal

63.0

14.9

Total

114.6

(130.0)

Source: DBAG

Market outlook

German economy in a moderate recession

German economic activity remains muted, with a 0.1% sequential decline in real GDP in Q323, mostly driven by a 0.3% q-o-q fall in consumer spending. Both the German Ifo Business Climate Index and the ZEW Indicator of Economic Sentiment remain subdued. Current GDP forecasts for 2023 issued by the European Commission, the German government and the International Monetary Fund (IMF) suggest a 0.3–0.5% decline. The IMF expects GDP to grow moderately by 0.8% in 2024, which we believe may be supported by a turn in the interest rate cycle, with the market currently pricing in six 25bp rate cuts by the European Central Bank for 2024. The German consumer price index (CPI) eased substantially in November to 3.2% (vs 3.8% in October), the lowest level since August 2021. That said, this includes some base effects, most notably the contribution from lower energy prices, while food prices continued to increase by 5.5% y-o-y. Nevertheless, the annual core inflation rate also moderated to 3.8% in November. The IMF now expects the German 2023 CPI to be 4.1%, followed by 2.8% in 2024. Lower inflation, coupled with interest rate cuts and nominal wage growth, may have a positive impact on consumer spending in the near term.

Some green spots in PE activity, but full recovery yet to come

Global M&A activity remains subdued, with the Q323 value at a 10-year low, affected by macro headwinds, a disconnect between buyers’ and sellers’ expectations and the lower debt availability, especially in the syndicated loans market. While European new loan issuance picked up in Q323 to €7.4bn, the highest level since Russia’s invasion of Ukraine, this was mostly driven by loan refinancings rather than accretive M&A activity, according to the Quarterly Liquid Loan Market Commentary from Partners Group.

That said, PitchBook noted in its Q323 European PE breakdown report that there remains some appetite for dealmaking, with deal value down only 2.8% y-o-y and still being above pre-2020 levels. Importantly, market activity shifted away from megadeals and towards smaller transactions in the €100–500m range (often add-ons to larger PE holdings), which accounted for 56.8% of all deals in 9M23. This is important in the context of DBAG, given its focus on the PE mid-market with a target enterprise value of €50–250m.

Moreover, European PE exit activity improved from the lows of late 2022 and Q123, with an exit value of €97.0bn in Q323 (vs €60.0bn in Q322 and €100.1bn in Q321), according to PitchBook. However, this was driven by several mega-exits of over €1.0bn, for instance the Arm IPO. Therefore, a broad-based recovery in exit activity is yet to come. PE fundraising remained robust with €86.0bn in 9M23 vs €76.1bn in 2022 and €118.6bn in 2021 (PitchBook data), which bodes well for an activity rebound as the market cycle turns. In Germany alone, PE deal activity reached €55.7bn in 9M23 versus €93.5bn in 2022 and €84.3bn in 2021, while exits stood at €20.7bn in 9M23 versus €33.5bn in 2022 and €56.8bn in 2021, according to PitchBook (see Exhibits 9 and 10).

Exhibit 9: German private equity deal value and count

Source: PitchBook. Note: *Data at end-September 2023.

Exhibit 10: German private equity exit value and count

Source: PitchBook. Note: *Data at end-September 2023.

Private debt on the rise

The lacklustre activity in the syndicated loan market allowed private debt providers to gain market share in the global credit markets. For instance, private debt funds financed 55% of all MBO transactions in Germany in 2022, according to Houlihan Lokey MidCapMonitor. Compared to traditional bank lending, private debt offers more flexible debt structures and often a shorter financing process. At the same time, private debt is normally more expensive than bank lending, and floating-rate structures benefited private debt investors amid the monetary policy normalisation. Private debt strategies continue to attract significant inflows from institutional investors, with H123 global fundraising of US$94.9bn vs €91.4bn in H122, with a direct lending share of 32.0% and mezzanine 27.9%, according to PitchBook. The growing interest in private debt is illustrated by the expectation of Ares Management (a global alternative asset manager) that the global private credit market will double to US$3trn in five years.

Exhibit 11: Global private debt assets under management

Source: PitchBook; Note *Data at end-December 2022

Displaying a strong long-term track record

Since 1997 (when it structured its first MBO), DBAG has financed 68 MBOs and made 19 minority growth financing investments. Out of this, 41 MBOs and 16 growth financings were realised in full or mostly, with the full and partial exits generating a healthy MOIC of 2.7x and 2.9x, respectively. In Appendices 1 and 2, we present DBAG’s fully realised MBOs and growth financings.

Furthermore, the company announced in July 2023 that it agreed its first exit from its long-term investment portfolio with the sale of R+S, a provider of technical building services. 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% since March 2021. Part of the R+S exit proceeds was 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.

Including unrealised investments, DBAG increased the value of equity invested since 1995 by 1.9x (MBOs) and 2.7x (growth financings), with its current portfolio held at 1.1x cost on average (including 1.2x for holdings in industrial sectors and 1.3x in growth sectors). The lower unrealised MOIC comes from the fact that PE portfolios are a blend of different investment vintages, and each successful disposal (in line with a target return) normally reduces the average unrealised MOIC of the portfolio (DBAG has a balanced portfolio by vintage, see Exhibit 12). In the case of DBAG, an additional factor weighing on the unrealised MOIC (and the long-term NAV TR performance) was the demanding macro environment for some of its industrial holdings. Consequently, the ratio of fair value to acquisition cost at end-September 2023 for vintages of more than five years (1.19x) is only marginally higher than for vintages up to two years (1.16x), according to our calculations. That said, over the last year, DBAG was one of the top performers within this group, see Exhibit 13.

Exhibit 12: DBAG’s portfolio by vintage at end-September 2023

Source: DBAG

Exhibit 13: Listed PE investment companies peer group at 13 December 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

440

16.9

32.8

44.1

191.3

54.4

15.7

10.7

164.0

(23.4)

2.9

3i

23,263

31.6

131.0

192.3

789.3

96.0

130.9

163.8

732.5

26.7

1.2

GIMV

1,068

12.0

27.5

21.7

108.8

(2.8)

(7.8)

2.0

70.5

(13.1)

5.8

HgCapital Trust

1,831

11.0

72.3

161.3

446.5

16.5

45.2

116.0

348.6

(19.0)

1.6

ICG Enterprise Trust

778

4.1

77.3

102.8

238.3

23.5

63.3

55.6

190.1

(39.3)

2.8

Oakley Capital Investments

836

4.4

96.3**

177.4**

282.4**

19.9

84.7

150.4

216.0

(30.2)

0.9

Princess Private Equity

603

7.5

25.4

57.7

207.6

2.3

15.2

27.3

200.9

(32.2)

7.2

abrdn Private Equity Opps

683

5.1

76.3

109.4

315.1

11.7

52.2

53.5

213.4

(42.1)

3.5

Average

4,152

10.8

72.3

117.5

341.1

23.9

54.8

81.2

281.7

(21.3)

3.3

Rank

8

2

6

7

7

2

6

7

7

4

4

Source: Morningstar, Edison Investment Research. Note: *12-month NAV performance in sterling terms based on end-September 2023 ex-par NAV, or latest earlier available ex-par NAV (end-July 2023 for ICG Enterprise Trust). **Oakley Capital Investments’ three-, five- and 10-year NAV TRs are calculated from end-June 2020, end-June 2018 and end-June 2013, respectively, as end-September NAV is not available for these years.

Valuation

DBAG continues to trade at a discount to last reported NAV (currently 23.4%, see Exhibit 7), while historically it traded at a premium to NAV (the average premium over the five years to end-2021 is c 18%). We believe this was due to the share price reflecting the additional value of DBAG’s fund services business, which manages c €1.9bn of third-party capital and whose value is not directly captured within its reported NAV.

We believe it is instructive to examine the market-implied valuation 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 for DBAG’s fund services segment, we use a group 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): Blackstone, EQT, Partners Group, Intermediate Capital, Tikehau Capital and Cohen & Steers. In the case of PE investments, we use the peer group shown in Exhibit 13, excluding 3i.

Exhibit 14: Analysis of DBAG’s market value by segment 

Fund services in line with peers

P/E multiple applied to fund services segment’s valuation

16.8x

Midpoint of management FY24 guidance for fund services pre-tax profit of €9–13m

€11m

Implied value of fund services segment

€185.1m

Implied value of private equity investments segment

€327.4m

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

51%

Private equity investments in line with peers

 

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

29.3%

Implied value of private equity investments segment

€473.3m

Implied value of fund services segment

€39.1m

Implied FY24e earnings multiple of fund services segment*

3.6x

Source: Deutsche Beteiligungs, Edison Investment Research.

Assuming the fund services segment is valued in line with peers (ie at a 16.8x FY24e earnings multiple) and using DBAG’s current market capitalisation, the implied value of DBAG’s PE investments would be €327m (ie 51% below its end-September 2023 NAV), while DBAG’s peers currently trade at an average c 29% discount. While some of this difference could potentially be explained by the subdued outlook for the German economy, DBAG’s discount may still be considered wide given its portfolio changes in terms of sector exposure in recent years, as discussed above.

On the other hand, if we assume that the PE investments were valued in line with peers (at a 29% discount to NAV), then DBAG’s current market capitalisation would imply a 3.6x FY24e earnings multiple for DBAG’s fund services segment. This seems to be a quite low multiple, especially given management’s expectations of an increase in fund services pre-tax profit to €11–16m by FY26, as discussed above.

Recent realisations boosting DBAG’s liquidity

DBAG made €63.6m of investments from its balance sheet in FY23 compared to €176.8m in FY22 and €59.2m in FY21 (see Exhibit 15). This includes €28.8m spent on three new investments completed in the period:  AOE Group (an agile software provider), Avrio Energy (a biogas platform) and TBD (a critical infrastructure service provider). On top of this, DBAG agreed a new MBO of ProMik (a provider of programming and testing solutions for the electronics manufacturing industry) and a long-term investment in NOKERA (reinvesting part of the R+S proceeds). The balance of the amount invested in FY23 was spent on financing add-on acquisitions (€13.6m) and investments in existing portfolio companies (€21.2m).

Exhibit 15: DBAG’s historical investments

Source: DBAG

Despite recent muted global M&A volumes (weighing on exit activity across PE markets), DBAG completed several successful exits in late 2022 and 2023. As discussed above, these include full disposals of Heytex and Pmflex, as well as partial disposals of Cloudflight and PMM Pfaudler. The resulting €48.7m net cash inflow from investment activity allowed DBAG to pay down its two revolving credit lines of €106.7m in aggregate. These are now fully at DBAG’s disposal for drawdown, together with its €20.0m cash position at end-September 2023.

The above €126.7m liquid resources covered 52% of DBAG’s outstanding commitments to its funds at end-September 2023, which we consider a safe level given the latest end of the investment period of DBAG Fund VIII (to which DBAG has €106.9m outstanding commitments) is December 2026. After including the €100m expected commitments to ELF Capital funds, the coverage ratio stands at 37%. DBAG’s liquidity will be further assisted by the R+S realisation proceeds once the deal is completed. While the disposal price was not disclosed, we note that DBAG booked an uplift to the previous carrying value of €14m on the back of the deal in Q323 and that it invested €18m in total into R+S. DBAG’s management expects to cover the shortfall between current liquidity and future commitments through further realisations from its current portfolio.

Dividends will now be supplemented with buybacks

According to DBAG’s dividend policy updated in November 2023, the company aims to pay out a stable dividend with a minimum payment of €1.00 per share, which is also management’s payout recommendation for FY23. This represents a reduction from DBAG’s earlier mid-term dividend target for 2023–2025 of €1.60 per share. We believe that DBAG’s more cautious approach to dividend payments may be partly due to the financing required for the above-mentioned ELF Capital acquisition and the associated fund commitments. That said, it is above the €0.80 per share payment made based on FY22 results and still represents an attractive dividend yield of c 3.7%.

Moreover, we note that DBAG shifted from a pure dividend policy to a broader distribution policy, as management highlighted that it would consider buybacks on a more regular basis. We note that at the current discount to NAV, share buybacks would be NAV accretive. Management has not shared any details in the terms of the size of a potential share repurchase programme yet.

Exhibit 16: DBAG’s dividend payments

Source: DBAG. Note: *Management board recommendation.

DBAG’s approach to ESG

DBAG has been a signatory of the United Nations Principles for Responsible Investment from December 2021 and 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. 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 has integrated these ESG-based KPIs (covering a multi-year horizon) into the budget plans of its portfolio companies starting in FY23.

Moreover, DBAG enhanced its target system through the addition of ESG-related goals at the holding level from FY23. These include CO2 footprint (scope 1–3, 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 aimed 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). Its actual carbon emission per employee rose to 2.9 tonnes in FY23, mainly due to an increase in transaction activity which led to more business trips than initially assumed. DBAG now targets a carbon footprint per employee of 2.8 tonnes in FY24. DBAG was able to improve the average employee satisfaction score to 65% in FY23 versus initially planned 63% and 62% in FY22 (in line with the 65% target by FY25). The proportion of women within DBAG’s investment advisory team is 17%, with improvement targeted for the coming years. Finally, DBAG emphasises zero tolerance for any form of corruption and other unethical business practices, and therefore wants to avoid any payments from compliance breaches (which it was able to achieve in FY23). We also note that at the beginning of FY23, DBAG supported a local reforestation campaign launched for the Hesse state forest. Moreover, it decided to support a carbon reduction project in Italy.

Capital structure

At end-September 2023, DBAG’s share capital consisted of 18.8m ordinary shares of no par value. DBAG shares are predominantly owned by private investors (43.2%) and family offices (36.2%).

Exhibit 17: Major shareholders

Exhibit 18: Shareholders by type

Source: DBAG, Refinitiv at 14 December 2023

Source: DBAG, at 30 September 2023

Exhibit 17: Major shareholders

Source: DBAG, Refinitiv at 14 December 2023

Exhibit 18: Shareholders by type

Source: DBAG, at 30 September 2023

Appendix 1: DBAG’s MBO realisation track record

Exhibit 19: DBAG’s MBO transactions realised* between 1997 and end-September 2023

Company

Investment
date

Divestment
date

Holding period (years)

Exit
route

Exit
multiple (x)

Heytex

Nov-12

Feb-23

10.3

Secondary buyout

N/A

Frimo

Nov-16

Feb-23

6.3

Write-off

0.0

Pmflex

Sep-20

Jan-23

2.3

Trade sale

>2.0

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

-

2.7

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

Appendix 2: DBAG’s growth financing realisations track record

Exhibit 20: DBAG’s growth financings realised between 1996 and end-September 2023

Company

Investment date

Divestment date

Holding period (years)

Exit route

Exit multiple (x)

BTV Multimedia

Aug-18

May-23

4.8

Secondary buyout*

3.0

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

-

2.9

Source: DBAG. Note: *Sold to Netceed, a portfolio company of ETC Group. **Attributable to equity investment. Total exit multiple, including debt financing, was 3.2x.


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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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Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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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.

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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

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London, WC1R 4PS

United Kingdom

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