Deutsche Beteiligungs — Doubling down on investment opportunities

DBAG posted an NAV total return of 4.2% for the first nine months of FY24 (9M24; to end-June 2024), resulting in a broadly flat NAV over the last 12 months in total return euro terms. The 9M24 performance was primarily driven by the c €40m positive impact from higher valuation multiples applied to DBAG’s PE investments (see Exhibit 1). Management highlighted that half of DBAG’s portfolio companies’ peer groups contributed positively. The impact of multiples also reflects two recent disposals, primarily the successful exit from in-tech completed during the period (see below). The positive contribution from changes in earnings stood at €27m in 9M24 and was assisted by most sectors (healthcare, industry and industrial technology in particular, eg Congatec), partly on the back of add-on acquisitions. However, this was offset by the €28m negative impact from higher debt across the portfolio companies, which was particularly driven by add-on acquisitions across DBAG’s healthcare exposure, as operasan acquired three renal medical care centres in the period.

DBAG’s fund investment services segment reported €36.2m of income and an EBITA of €11.7m, which represents a slight year-on-year increase (see Exhibit 2). The segment’s pre-tax profit reached €9.0m in 9M24, down from €11.3m in 9M23 due to the impact of the amortisation of intangible assets in conjunction with the ELF Capital Group acquisition.

Management updated its FY24 NAV guidance, narrowing the previously indicated range of €675–790m to €675–710 (or €36.41–38.30 per share), which assumes stable public market valuations. At the same time, DBAG reiterated its mid-term expectations for FY26 of NAV of €840–980m and earnings before taxes of the fund investment services segment of €11–16m.

DBAG’s portfolio at end-June 2024 consisted of 37 portfolio companies and one externally managed foreign buyout fund, with the top 15 investments making up 70% of its portfolio value.

DBAG’s management highlighted that it has recently seen a significant pickup in buyout investment opportunities to 94 in April to June 2024 compared to 76 in the period January to March 2024 and 56 in the period April to June 2023 (see exhibit above). We understand that this is due to a combination of several factors. Firstly, deal activity across global M&A markets is slowly rebounding amid expectations of monetary easing. Secondly, DBAG’s management indicated a more benign competitive environment amid ongoing consolidation in the German PE mid-market, as evidenced by two of its competitors no longer pursuing new investments. Finally, DBAG benefits from cross-deal flow from ELF Capital, a manager of credit funds in which DBAG recently acquired a majority stake (though we note that DBAG does not plan to tap into ELF Capital’s debt funding for its PE transactions).

The new buyout opportunities will be pursued primarily through DBAG’s investments alongside DBAG-managed funds, which mostly seek acquisitions of a majority stake, including the flagship buyout funds focused on equity investments of €40–220m and Expansion Capital Funds (ECF) focused on small management buyouts with an initial equity ticket of €10–40m (and up to €60m with follow-on capital increases). DBAG’s latest flagship buyout fund is DBAG Fund VIII; its investment period ends in December 2026 and DBAG Fund VIII currently has significant dry powder, especially following the recent disposal of in-tech. Management had indicated earlier that upon completion of this exit, the fund will be only c 30%+ invested, all else being equal (therefore, DBAG is in no rush to launch its successor, which is more likely in 2026). The company also manages the DBAG ECF IV fund; its investment period ends in December 2028. At end-September 2023 (last available data), DBAG had €106.9m and €38.1m outstanding commitments to DBAG Fund VIII and DBAG ECF IV, which will be drawn upon new investments by these funds.

Furthermore, DBAG’s management underlined the good environment to pursue new private debt investments alongside ELF Capital Funds (to which it has already made €100m in commitments), and that DBAG made its first private debt investment through an ELF Capital Fund in the last reported quarter, which has an expected internal rate of return (IRR) in the mid-teen percentage range. Given the ample opportunities on the buyout and private debt side, DBAG is less likely to prioritise long-term balance sheet investments (which comprise mainly investments in family-owned businesses to support growth or change of ownership), as these have a longer holding period (usually more than seven years). Therefore, it expects one to two such deals per year.

The particularly good window of opportunity for new investments encouraged DBAG to issue €100m worth of senior unsecured convertible bonds in July 2024 (see our flash note for details). DBAG’s liquid resources at end-June 2024 stood at €121.8m and included €31.7m of financial resources and €90.2m of undrawn credit lines (out of the total €110.2m, maturing in June 2027). The in-tech and Solvares disposals, coupled with the above-mentioned convertible debt issue, will add a further €150m liquidity. All the above liquid resources cover most of DBAG’s outstanding investment commitments at end-June 2024 of €299.6m. We also note that DBAG’s balance sheet liabilities include a c €33.5m purchase price obligation related to the remaining 49% stake in ELF Capital Advisory, though the final price will be determined based on the performance of the acquiree.

Between September 2023 and June 2024, DBAG closed two new investments: the buyout of ProMik (announced in October 2023) and the long-term investment in NOKERA (announced in July 2023 in conjunction with the R+S realisation), discussed in our previous note. In early August 2024, DBAG announced the acquisition of a controlling stake in UNITY, a management consultancy specialising in technology consulting and digital transformation processes, which in 2023 generated revenue of €72m according to preliminary figures. DBAG’s management indicated that the company grew its revenues by an average 13% in recent years, above the broader market growth of 7%. It now has a wide client base of DAX40 companies and mid-sized enterprises across the DACH region, with some prominent clients including Airbus, GEA, Lufthansa Technik, Mercedes-Benz and Miele. UNITY joins other DBAG portfolio companies from the IT software and services sector, such as Akquinet, AOE, Cloudflight and freiheit.com. Moreover, DBAG’s portfolio companies executed nine add-on acquisitions between end-September 2023 and end-June 2024 (of which seven have already been closed in the period), including two by Akquinet and two by AOE.

In terms of realisations, DBAG completed the successful disposal of in-tech (a software development, testing and validation business) in Q324, which yielded a strong multiple on invested capital (MOIC) of 3.3x and an IRR of 68% (the deal was announced in April 2024). We note that the disposal price represented a very healthy 63% uplift to the carrying value reflected in DBAG’s books six months earlier, reinforcing its portfolio valuations. Moreover, Abbelen from More than Meals group (DBAG’s portfolio company) was sold in Q324. DBAG also made a partial exit from Solvares and full disposals of GMM Pfaudler and Gienanth in H124 (as discussed in our previous note).

DBAG continues to trade at a discount to last reported NAV (currently 31%, see Exhibit 3), while historically it traded at a premium to NAV (the average premium over the five years to end-2021 was c 18%). We believe this was due to the share price reflecting the additional value of DBAG’s fund services business, which manages c €2bn 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 in 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. We also added CVC Capital Partners, which recently completed its IPO. In the case of PE investments, we use the peer group shown in Exhibit 5, excluding 3i.

Assuming the fund services segment is valued in line with peers (at a 23.3x FY24e earnings multiple) and using DBAG’s current market capitalisation, the implied value of DBAG’s PE investments would be c €212m (65% below its end-June 2024 NAV, which we conservatively adjust for the intangibles arising from the ELF Capital acquisition), while DBAG’s peers currently trade at an average c 25% discount.

Some of this difference could potentially be explained by the subdued German economy (which weighed on DBAG’s historical performance versus listed PE peers, see Exhibit 5). According to the July 2024 projections of the International Monetary Fund, German GDP will increase by a mere 0.2% in 2024, followed by 1.3% in 2025, as it expects continued weakness in the manufacturing sector to dampen economic recovery. DBAG’s management highlighted that selected portfolio companies are currently facing challenges, in some cases due to macro factors and in other cases due to poor management. We also note that, while DBAG has delivered a number of successful exits in recent years, we calculate that its average ratio of disposals to opening NAV in FY19–23 stood at c 11%, below the level implied by PE’s usual holding period of three to five years (DBAG disposals in 9M24 of €64.8m represented 11% of opening NAV excluding intangible assets). Still, DBAG’s discount may be considered wide given its portfolio changes in terms of sector exposure in recent years, as discussed in our previous note.

On the other hand, if we assume that the PE investments were valued in line with peers, then DBAG’s current market capitalisation would imply a mere 0.8x FY24e earnings multiple for DBAG’s fund services segment. This seems to be quite a low multiple, especially given management’s expectations of an increase in fund services pre-tax profit to €11–16m by FY26 (upon the expected launch of DBAG Fund VIII’s successor). We also note that, based on the minimum €1.00 dividend per share as per DBAG’s recently updated distribution policy, the company’s shares now offer a 4.0% yield. On top of this, the company launched a buyback programme of up to €20m earlier this year, which will involve the repurchase of up to 800,000 shares, or c 4.25% of its share capital (excluding dilution from the convertible bond). To 9 August 2024, DBAG had spent c €11m on repurchasing 423k shares at an average price of €26.28 (which means that the buybacks were NAV accretive).

We note that the €30.7952 conversion price of the recently issued convertible bonds represents a c 14.7% discount to DBAG’s end-June 2024 NAV, which would translate into a minor 2% end-June 2024 NAV per share dilution upon conversion.