Deutsche Beteiligungs — Solid liquidity for new investments

Deutsche Beteiligungs (FRA: DBAN)

Last close As at 22/05/2024

EUR27.80

0.15 (0.54%)

Market capitalisation

EUR523m

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Research: Investment Companies

Deutsche Beteiligungs — Solid liquidity for new investments

Deutsche Beteiligungs (DBAG) posted a healthy 14% NAV total return in H123 (ending March 2023) due to expanding public peer multiples, the first time recognition of 2023 budgeted results (in Q123) and value-accretive add-on acquisitions. Proceeds from recent realisations have provided DBAG with sizeable capital to pursue new investments (management remains committed to investing €96m pa on average in 2023–25), though global M&A markets remain relatively muted, limiting DBAG’s investment activity. DBAG’s shares now trade at a 14% discount to NAV, whereas they traded at an average 18% premium in 2017–21 (despite its NAV not reflecting its fund services business).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Deutsche Beteiligungs_resized

Investment Companies

Deutsche Beteiligungs

Solid liquidity for new investments

Investment companies
Private equity

25 May 2023

Price

€29.65

Market cap

€558m

NAV*

€646m

NAV per share*

€34.38

Discount to NAV

13.8%

*As at end-March 2023.

Yield

2.7%

Shares in issue

18.8m

Code/ISIN

DBAN/DE000A1TNUT7

Primary exchange

Frankfurt

52-week high/low

€37.60

€20.85

€33.59

€30.81

Gearing

Net gearing at 31 March 2023

0.0%

Fund objective

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

Bull points

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

Growing exposure to broadband, IT services and software, and healthcare.

Stable and recurring cash flow from fund services.

Bear points

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

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

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

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

Deutsche Beteiligungs is a research client of Edison Investment Research Limited

Deutsche Beteiligungs (DBAG) posted a healthy 14% NAV total return in H123 (ending March 2023) due to expanding public peer multiples, the firsttime recognition of 2023 budgeted results (in Q123) and value-accretive add-on acquisitions. Proceeds from recent realisations have provided DBAG with sizeable capital to pursue new investments (management remains committed to investing €96m pa on average in 2023–25), though global M&A markets remain relatively muted, limiting DBAG’s investment activity. DBAG’s shares now trade at a 14% discount to NAV, whereas they traded at an average 18% premium in 2017–21 (despite its NAV not reflecting its fund services business).

DBAG’s portfolio valuations rise as earnings outlook and multiples improve

Source: DBAG

Why consider Deutsche Beteiligungs now?

DBAG is a well-established investor and asset manager in the German private equity (PE) mid-market and a go-to partner for private company owners, especially families and founders. It has been increasing its exposure to new ‘growth’ sectors including IT services and software (18% of end-March 2023 portfolio value), broadband/telecom businesses (17%) and healthcare (11%). At the same time, DBAG’s industrial portfolio (currently valued at 1.1x acquisition cost on average) may appeal to investors seeking exposure to cyclical value companies in anticipation of a potential rebound in the German economy on the back of an abating energy crisis, adjusting supply chains and a recovery in foreign demand.

The analyst’s view

DBAG recently collected significant proceeds from the full disposals of Cloudflight, Pmflex and Heytex and the partial exit from GMM Pfaudler (it was yet to receive the consideration for the sale of BTV Multimedia at end-March 2023). This allowed DBAG to pay down most of its drawn credit facility and retain a sizeable level of financial resources (€55.9m), which together with the available credit line covered 73% of its outstanding commitments at end-March 2023. It is therefore well-positioned to continue its investment activity. That said, while it saw a sequential pick-up in reviewed investment opportunities, they tend to be smaller on average (at the lower end of its targeted €50–250m range in terms of enterprise values), which is likely due to more limited debt availability for M&A deals.

A solid 14% NAV total return in H123

DBAG’s positive NAV momentum continued in Q223 (ended March 2023), resulting in an NAV total return (TR) of 14% in euro terms in H123 (c 5% over the 12 months to end-March 2023) and a net profit of €82.6m in H123 (vs a loss of €35.8m in H122). This was mainly driven by expanding valuation multiples across the portfolio (€67.2m positive effect in H123) on the back of higher public peer multiples across almost all sectors (the mDAX and DAX were up c 24% and 29% between end-September 2022 and end-March 2023, respectively) and recognition of agreed disposal prices (BTV Multimedia in particular).

Furthermore, the operating performances of DBAG’s portfolio companies added €24.1m to portfolio valuations, with nearly all portfolio companies contributing positively in H123, with only two exhibiting visible negative contribution. The operating performance impact includes €67.4m from the first-time introduction of 2023 budgeted figures in the Q123 valuations (the total earnings impact during this quarter was €23.9m) and add-on acquisitions (see below for details). This was partly offset by the €43.3m impact of increasing net debt (primarily due to financing of add-on acquisitions). At end-March 2023, 64% of DBAG’s portfolio companies (by value) had a net debt to EBITDA ratio of at least 4.0x (and 72% had a ratio at or above 3.0x), compared to 53% (73%) at end-2022.

We note that the valuation impact from operating performance already captures a recent slowdown in new orders across DBAG’s industrial portfolio (factory orders in the Germany economy reduced significantly by 10.7% m-o-m in March 2023). Industrial and industrial technology companies made up 32% of DBAG’s portfolio value at end-March 2023, with a further 12% in industrial services companies. Overall, DBAG’s portfolio holdings from industrial sectors were held at 1.1x cost at end-March 2023 (vs 1.0x at end-2022).

DBAG’s fund services segment (which had assets under management of €2.6bn at end-March 2023) continues to deliver a steady income stream, with H123 income of €22.6m (up c 3% y-o-y). This together with the c 5% y-o-y decline in the segment’s net expenses (last year’s figure included higher consultancy expenses and a €2m one-off expense related to the departure of a board member) translated into a segment profit of €7.2m (up 25% y-o-y), on track to meet the FY23 guidance of €13–15m (vs €15.4m reported in FY22).

Exhibit 1: Income statement by segment (€m)

H123

H122

y-o-y

Net income from investment activity

81.3

(35.8)

N/A

Other income/expenses

(5.6)

(5.8)

-2.9%

PE investments pre-tax profit

75.7

(41.5)

N/A

Fund services income

22.6

21.9

3.1%

Other income/expenses

(15.3)

(16.1)

-4.9%

Fund services profit pre-tax

7.2

5.8

25.4%

Consolidated net profit

82.6

(35.8)

N/A

Source: DBAG

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

H123

H122

Changes in fair value of unlisted investments

41.2

(60.5)

Change in earnings

67.4

22.8

Change in debt

(43.3)

10.7

Change in multiples

67.2

(95.9)

Change in exchange rates

(3.9)

3.3

Other

(46.3)

(1.4)

Net result of disposal

43.1

13.9

Total

84.3

(46.6)

Source: DBAG

The positive portfolio developments encouraged DBAG’s management to raise its FY23 guidance for net income to €85–115m (vs €70–80m previously) and for NAV to €610–715m (vs €605–675m previously). We note that DBAG’s full-year guidance always assumes public market multiples in line with the levels as at the last reporting date.

Ample firepower for new investments

DBAG’s recent exits provide the company with a comfortable financing position to pursue further investments (its medium-term targeted investment volume remains €96m pa over 2023–25). DBAG reported a net cash inflow from its investment activity of €73.4m in H123 on the back of proceeds from recent full disposals of Cloudflight, Pmflex and Heytex and a partial exit from GMM Pfaudler (see our previous note, Robust exit activity in Q123, for details). DBAG also reported the disposal of Frimo (which was a global provider of tooling and plants for the production of high-performance plastic components primarily for car interiors, acquired in 2016) following the company’s insolvency (which was already reflected in DBAG’s NAV prior to H123).

The exit proceeds allowed DBAG to pay down most of the drawn part of its €106.7m credit facility (of which €10m remained drawn at end-March 2023) and translated into €55.9m of financial resources. Together with the undrawn credit facility, this results in €152.6m of available liquidity, covering 73% of its outstanding co-investment commitments alongside its funds. The commitments should be drawn over a few years, as the investment period of DBAG Fund VIII (the only fund still in its investment phase) ends in December 2026. Importantly, DBAG’s available liquidity does not include the proceeds from the BTV Multimedia sales, which are yet to be collected.

DBAG’s new investment activity in H123 was limited to add-on acquisitions, with five deals completed and three agreed in the period. These included two add-ons each to akquinet and netzkontor, as well as add-ons to Karl Eugen Fischer, in-tech, MTWH and operasan (only operasan involved an equity contribution from DBAG, of €1m). While DBAG saw a sequential pick-up in investment opportunities in Q223 to 69, versus 51 in Q123 and 44 in Q422 (see Exhibit 3), management noted that the enterprise values for these potential deals was closer to the lower end of DBAG’s target range (€50m to €250m). Debt funding availability likely played a role here, as both banks and private debt funds remain selective in their deal selection and may be reluctant to enter into larger transactions.

Exhibit 3: DBAG’s investment opportunities by quarter

Source: DBAG

Valuation: Still traded at a significant discount to NAV

DBAG’s NAV reflects its PE investment portfolio. Having said that, DBAG manages fee-generating third-party assets of close to €2.0bn (assets under management including DBAG’s investment portfolio at end March 2023 was €2.6bn). Historically, DBAG’s shares have traded at a premium to NAV (the five-year average to end-2021 equals 18%), which we believe reflects the market-implied value of the fund services segment (Exhibit 4). However, with the softening valuations in the listed PE space amid macroeconomic headwinds, it currently trades at a c 14% discount to NAV. This compares to a 20–40% discount for most peers despite NAV underperformance (3i, which also manages third-party assets and generates fee income, trades at a c 9% premium to NAV currently).

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

Source: Refinitiv, Edison Investment Research

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

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

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

Fund services in line with peers

Earnings multiple applied to fund services segment’s valuation

17.6x

Implied value of fund services segment*

€246.1m

Implied value of private equity investments segment

€311.0m

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

52%

Private equity investments in line with peers

 

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

28.5%

Implied value of private equity investments segment

€462.0m

Implied value of fund services segment

€95.5m

Implied FY23e earnings multiple of fund services segment*

6.8x

Source: DBAG, Edison Investment Research. Note: *Based on the midpoint 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 PE investment companies. Assuming the fund services segment is valued in line with peers (ie at a 17.6x FY23e earnings multiple), the implied value of DBAG’s PE investments is €311m (ie 52% below its end-March 2023 NAV), while DBAG’s peers currently trade at an average c 29% discount (excluding 3i, see Exhibit 6.

The wider discount may be at least partially justified by DBAG’s high exposure to the German industrials sector (see above), which has been experiencing market headwinds for a prolonged period, even before the pandemic. We believe this is an important factor behind DBAG’s NAV underperformance versus peers.

While the macroeconomic outlook remains uncertain, it improved somewhat for Germany compared to late 2022, as the risk of a gas shortage has diminished, energy prices have softened and policy support for households and companies has been implemented. Moreover, supply chain bottlenecks have started to ease as China’s economy reopened. The IMF forecasts only a mild recession in Germany in its latest World Economic Outlook from April 2023 (a 0.1% real GDP decline in 2023), though with a still elevated inflation rate of 6.2% in 2023. In a joint publication in April 2023, major German economic research institutes forecasted GDP growth of 0.3% in Germany for 2023 (vs a 0.4% contraction in the winter half-year 2022/23 publication), with inflation running at 6.0%, dampening private consumption. The European Commission (EC) expects Germany’s GDP to increase 0.2% this year, highlighting that its industry has proven resilient to elevated production costs and equipment investment is set to recover as full order books support manufacturing and exports. That said, we acknowledge the weak March factory orders in Germany as discussed above, suggesting that the road ahead may not be entirely smooth.

Based on the latest payments for FY22, DBAG’s dividend yield stands at 2.7%. DBAG decided to recommend a lower DPS to be paid from FY22 profits to secure liquidity in the current environment. That said, it intends to return to a €1.6 DPS in the medium term (2023–25).

Exhibit 6: Listed PE investment companies peer group at 24 May 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

484

9.0

56.8

46.8

194.5

0.0

22.7

(12.5)

133.2

(13.8)

2.7

3i

18,478

36.6

141.5

193.4

752.1

26.7

137.5

136.5

679.5

8.8

2.7

GIMV

1,039

(0.2)

21.8

17.5

89.9

(12.2)

2.9

7.4

73.0

(8.7)

5.9

HgCapital Trust

1,749

10.4

108.9

174.1

386.4

(19.6)

63.0

114.8

287.4

(18.9)

1.8

ICG Enterprise Trust

792

14.4

73.9

117.4

264.9

(9.9)

64.1

43.4

156.2

(38.8)

2.6

Oakley Capital Investments

820

17.8

99.9

190.1

304.0

8.9

147.2

192.2

232.0

(30.4)

1.0

Princess Private Equity

582

3.7

52.7

66.8

195.9

(17.0)

17.1

17.9

146.3

(34.6)

3.8

abrdn Private Equity Opps

683

7.8

87.8

118.8

290.5

(18.0)

79.5

52.2

206.7

(39.8)

3.3

Median

3,449

12.9

83.8

125.4

326.2

(5.9)

73.0

80.6

254.4

(23.2)

3.0

Rank

8

5

6

7

7

3

6

8

7

3

4

Source: Morningstar, Edison Investment Research. Note: *12-month NAV performance in sterling terms based on end-March 2023 ex-par NAV, or latest earlier available ex-par NAV (end January 2023 for ICG Enterprise Trust). **The 10-year period for DBAG, is calculated starting from end-April 2013 as end-March 2013 NAV is not available; for Oakley Capital Investments, the 3-year, 5-year and 10-year NAV TR calculations are based on end-December 2020, end-December 2018 and end-December 2013 values, respectively.

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.

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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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London │ New York │ Frankfurt

20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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