Deutsche Beteiligungs — Solid liquidity for new investments

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).

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.

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.

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).

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.

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).