Local investor sentiment is warming up

German economic growth remains subdued due to, among other things, a weak manufacturing sector (including automotive, machinery and chemicals) and falling real estate prices. The International Monetary Fund (IMF) forecasts GDP growth of 0.3% in 2025 and 1.1% in 2026. However, equity markets welcomed the recent proposals of incoming Chancellor Friedrich Merz to set up a €500bn infrastructure fund and to relax the ‘debt brake’ rule to exempt defence spending of more than 1% of GDP. The German parliament passed the fiscal package on 18 March (see details below). Meanwhile, European PE deal value and count increased by 35.4% and 18.2% y-o-y in 2024, respectively, according to PitchBook. Deal activity has recently started to broaden beyond the more recession-proof assets into businesses operating in more discretionary sectors.

Seeking to capitalise on the opportunity

DBAG is well-placed to invest into the next PE cycle, with €253m of available liquidity at end-2024, covering 76% of its outstanding commitments. Management intends to intensify its new investments and expects a pick-up in H125. This should allow DBAG to further diversify its portfolio. DBAG’s major investment completed in SFY24 was Great Lengths, an Italian producer and distributor of premium natural hair extensions for professional hairdresser salons globally.

Internal and external factors turning more positive

DBAG’s NAV per share declined by 4.8% from €37.59 at end-September 2024 to €35.78 at end-December 2024 (vs management guidance of €35–42 per share), translating into a modest one-year NAV total return (TR) of c 4.2% in euro terms. Lower valuation multiples had a negative effect of €41.5m (or 6.4%) on DBAG’s gross portfolio value (see Exhibit 1), with the decline coming mostly from the industry and industrial technology sectors (while IT software & services contributed positively). The reduced valuation multiples arose, in a large part, from DBAG’s standard practice at the end of each calendar year of rolling the earnings used to value its portfolio from current-year figures to budgeted next-year figures (2025 for the end-December 2024 valuations). DBAG then applies, for consistency, peer multiples for the upcoming year, which are normally lower than current-year ratios given the earnings growth expectations of the market for listed peer companies.

In the past, the negative effect from multiples in the fourth quarter of the calendar year was usually accompanied by a positive impact from change in earnings arising from the budgeted growth in earnings of DBAG’s portfolio companies. However, this year, DBAG reported a marginal negative impact from the change in earnings of €1.1m, as several portfolio holdings continued to be affected by the subdued macroeconomic conditions in Germany. According to the IMF’s January 2025 World Economic Outlook, Germany’s GDP (after falling by 0.2% in 2024) will grow by a mere 0.3% in 2025, followed by 1.1% in 2026 (which represents downgrades of 0.5pp and 0.3pp vs the October 2024 publication, respectively). DBAG’s currency effects (included in the €7.6m miscellaneous bucket) provided a moderate partial offset, while the impact of the change in net debt across the portfolio was marginal (a negative €1.2m). DBAG’s management highlighted that debt packages across its portfolio companies are robust.

Friedrich Merz aims to drive infrastructure and security spending

There is potential for an improvement in the market backdrop on the horizon, as the German parliament recently passed a major fiscal package proposed by the incoming Chancellor Friedrich Merz (adjusted following negotiations with Germany’s Green Party). The package involves setting up a €500bn, 12-year infrastructure fund for new projects. Furthermore, the reforms include a relaxation of the ‘debt brake’ rule (which limits Germany’s annual structural budget deficit to just 0.35% of GDP) to exempt security spending on defence, cybersecurity, civil protection and intelligence service of more than 1% of GDP. Merz wants a commission to separately develop proposals for a broader debt brake reform to boost investments. Moreover, German federal states will have the possibility to borrow the equivalent of up to 0.35% of GDP. Merz succeeded in getting his proposals approved by the parliament before the post-election change in the German parliament on 25 March, which would strengthen the position of the far-right Alternative for Germany (AfD), which, together with the radical left party, opposes Merz’s bills. The law now needs to be approved by the Bundesrat, a legislative body that represents the sixteen federated states of Germany at the federal level.

While the strong determination of the new government to bolster economic growth and security is commendable, we note that reforms of bureaucracy (which Merz also aims to address), the pension system and energy and climate policy were indicated as the three most urgently needed reforms in Germany, according to a recent survey conducted by the ifo Institute of 205 professors of economics. Nevertheless, the initial reaction of German equities to Merz’s announcement was very positive across the market cap spectrum, with the DAX, MDAX and SDAX up by 5%, 8% and 7% in the two days after Merz’s announcement, respectively. While this was largely offset later (not least due to geopolitics), all indices are up 15% or more in the year to date amid a sentiment improvement in Germany and across European equities more broadly.

A rebound in the European PE market

We also note the gradually improving conditions across the European PE market (as illustrated by the PitchBook data below). European deal value and count were up 35.4% and 18.2% y-o-y, respectively (see Exhibit 2). German PE deal value was up 63% y-o-y in 2024, supported by large deals such as Covestro and Techem. The German small- and mid-cap buyout market (ie for companies with enterprise values between €50m and €250m) experienced increases of 24% and 20% in deal count (42 transactions) and value (€4.8bn) in 2024, respectively, according to analysis by DBAG and the FINANCE Magazin. Despite the high level of dry powder accumulated in recent years, fund-raising remains strong in Europe at €122.3bn in 2024, broadly stable versus €123.6bn in 2023 and the peak level of €126.0bn in 2021. The European PE market also saw some initial revival in exit activity in Q424, leading to increases in exit value and deal count of 5% (to €287.9bn) and 18.6% y-o-y in 2024, respectively. This is ahead of the €210–260bn per year in 2014–20, though still 31% below the 2021 highs (see Exhibit 3).

The gap between buyers’ and sellers’ price expectations has begun to narrow, supported by a turn in the interest rate cycle and improving conditions in the debt financing markets (even if they remain tighter than long-term averages). Furthermore, PitchBook data indicate that the median European buyout entry multiple increased in 2024 to 12.2x, from 10.4x in 2023, and therefore returned to 2021–22 levels. This may be, at least partly, due to a greater proportion of higher-quality assets for which owners could obtain the desired valuation. That said, European deal activity has recently started to broaden beyond the more recession-proof assets with recurring revenue, in sectors such as business-to-business mission-critical software, healthcare and consumer staples, into businesses operating in more discretionary sectors. While higher public market valuations (with some initial signs of the IPO market opening up) and improving PE activity may support exit valuations, we also note that there is still a significant overhang of holdings ripe for an exit. Moreover, exits to corporates (which often accept a higher price reflecting expected strategic synergies) remain modest. As a result, the share of sponsor-to-sponsor deals by count reached 51.1% in 2024 (vs a 10-year average of 40%), according to PitchBook. This could act as a constraint to a more significant expansion in exit valuations, though we note that DBAG’s management highlighted that it is comfortable with current portfolio valuations, and its prudent approach to valuations is illustrated by the average 29% uplift on exits completed in FY24. Several macroeconomic and geopolitical risks persist, including uncertainty around future inflationary pressure and the extent of central bank rate cuts, as well as the turbulent start of Trump’s presidency (including the threat of tariffs). Still, we consider it likely that there will be a continued recovery in PE activity in 2025.

Management expects an inflection point in portfolio earnings

This positive shift in market sentiment unfolds at a time when the management considers DBAG to be on the verge of earnings growth across its broad portfolio, as the restructuring measures executed over the last two years are bearing fruit. The company emphasised that most of the negative impact from peer multiples in SFY24 arose from well-performing portfolio companies, which we understand provides scope for a re-rating going forward. Management confirmed its earlier guidance for FY25 (to end-December 2025) of NAV per share at €36–43 (implying an NAV TR of 1–21%) and suggested that the midpoint of the guidance should be a good reference point for management’s current expectations. We also reiterate that DBAG’s portfolio has changed over time in favour of sectors such as IT services and software (23% of portfolio value at end-December 2024), environment, energy and infrastructure (17%) and healthcare (9%), and away from more traditional industrial holdings.

DBAG’s management expects a pick-up in realisations during the summer and autumn this year. That said, we note that DBAG’s total portfolio is on average valued modestly above acquisition cost, with an average multiple on invested capital (MOIC) of 1.05x in its industry and industrial technology portfolio (vs 1.19x at end-September 2024), 1.10x for environment, energy and infrastructure holdings (unchanged vs end-September 2024) and 1.15x for its IT services and software and healthcare holdings (1.25x at end-September 2024). This partly reflects the fact that PE portfolios are generally 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. We believe that many of DBAG’s holdings will require more time to accrue sufficient value to make them ready for a successful exit and drive DBAG’s realisations to a more meaningful percentage of NAV (ie at least 20% as implied by the usual PE holding period). DBAG’s portfolio disposals represented on average 12–13% of the opening portfolio value per annum in the last five full financial years to end-September 2024. However, we note that DBAG has significant balance sheet headroom to pursue new investments without a high volume of realisations (see below). In SFY24, DBAG completed the partial sale of its long-term investment in Hausheld, a developer of smart meters for electricity networks (no return metrics were disclosed for the transaction).

Acceleration of new investments is high on management’s agenda

Despite the recent partial disposal of Solvares Group (see our December 2024 review note for details), the share of DBAG’s top five holdings remains relatively high at 36% as of end-December 2024. These include (in alphabetical order): congatec (an industrial technology company focused on high-performance embedded computer products), duagon (a provider of network components for data communication in railway vehicles), freiheit.com (a software engineering business), Green Datahub (a data centre owner) and Itelyum (which is active in the recycling of complex industrial waste).

After a more cautious FY24 in terms of new investments, DBAG’s management aims to ramp up its investment activity (especially in the first half of 2025) to deploy its excess cash. DBAG had €253m of available liquidity at end-December 2024, including €126m of cash and securities (c 15% of total assets) and €127m of undrawn credit lines. This covers 76% of DBAG’s outstanding investment commitments and provides ample room for DBAG’s new investment activity, which should be supported by the recent pick-up in opportunities arising from recovering global M&A activity, reduced local competition and cross-deal flow from ELF Capital Group. Management highlighted that one new debt transaction was signed in January (yet to be closed), with further transactions in the pipeline, and that DBAG has several PE transactions in the near-term pipeline. This should provide DBAG with the opportunity to increase portfolio diversification.

DBAG’s activity in SFY24 included the new investment in Great Lengths, an Italian producer and distributor of premium natural hair extensions for professional hairdresser salons globally. This is DBAG’s fourth platform investment in Italy into a business generating revenue of more than €47m per year. The founding family will retain a significant minority holding in the business. DBAG identified value-creation opportunities at Great Lengths including top talent attraction (hiring a chief commercial officer and new CFO, establishing an advisory board), expanding the company’s reach into under-penetrated regions such as the US (organically and via M&A) and its product offering (including application technologies), as well as sharpening its ESG profile. Moreover, DBAG completed the UNITY buyout agreed in the financial year to end-September 2024.

Valuation remains undemanding

DBAG’s five-year NAV TR to end-December 2024 reached 40.4% or 7.0% pa, which is somewhat behind the 8.5% pa posted by the DAX index and visibly below the average return of listed PE peers (see Exhibit 7) but broadly in line with the STOXX Europe 600 index (7.2%) and ahead of the German small-cap index (1.8% pa). Its five-year performance would be close to that of the DAX (at 8.1%) if the latest quarterly NAV dip was excluded. Meanwhile, its share price TR decoupled from the NAV performance and was negative over that period, leading to a discount to last reported NAV of 24% currently (see Exhibit 4). We note that, prior to 2022, DBAG’s shares traded at a premium to NAV (18% on average over the five years to end-2021), which we believe was due to the share price reflecting the additional value of DBAG’s fund services business, which manages c €2bn of third-party capital, the value of which is not directly captured within DBAG’s reported NAV. Given this and DBAG’s portfolio changes in terms of sector exposure, the current discount to NAV may be considered wide. The €30.7952 conversion price of the convertible bonds issued last year represents a c 14.7% discount to DBAG’s end-June 2024 NAV (last reported figure prior to the issue).

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: Blackstone, EQT, Partners Group, Intermediate Capital, Tikehau Capital, Cohen & Steers and CVC Capital Partners. 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 (on a 20.3x FY25e earnings multiple) and using DBAG’s current market capitalisation, the implied value of DBAG’s PE investments would be c €213m (50% below its end-December 2024 NAV, which we conservatively adjust for the intangibles arising from the ELF Capital acquisition), while DBAG’s peers currently trade at an average 24% discount. 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 an FY25e P/E ratio for the fund services business of just 8.1x (based on the midpoint of management’s unchanged FY25 guidance of €8–13m). This needs to be put in the context of management’s expectations of an increase in fund services pre-tax profit to €12–18m in FY27 (upon the expected launch of DBAG Fund VIII’s successor), see Exhibit 6.

DBAG’s fund services business reported an income of €13.7m in the short financial year 2024, up 19% y-o-y as it included a €1.8m one-off equalisation payment arising from the final close of DBAG ECF IV (which gathered around €250m commitments). This one-time item translated into a fund services EBITA of €5.1m vs €2.6m in Q123/24, ahead of the management guidance issued in November 2024 of €2–4m. Given the relatively measured capital deployment of DBAG Fund VIII (the latest buyout fund) and last year’s realisations, DBAG is in no rush to launch the next buyout fund (which is more likely in 2026 at the earliest). However, as the Solvares continuation fund (which DBAG earns fees on) has already been established, the company expects at least stable earnings in the fund services business in the near term versus the SFY24 run-rate.

Recently, DBAG fully completed its up to €20m buyback programme launched in February 2024, repurchasing around 800k of shares (representing c 4.25% of DBAG’s issued capital), and in late February 2025 launched another NAV-accretive programme of up to €20m. DBAG also proposed a dividend per share of €0.25 for SFY24, which on an annualised basis is consistent with its policy of paying out a stable dividend of €1.00 per share.