Deutsche Beteiligungs: Robust Recent Performance

Deutsche Beteiligungs AG (DBAG) is a listed private equity group focused on the German Mittelstand market. DBAG has grown NAV 18% per annum over the last ten years. But as the portfolio has rotated into the early stage of its investment cycle the majority of growth is likely to come from improved earnings rather than realisations. DBAG’s premium rating to peers has narrowed recently, which we believe reflects this young portfolio and an expected fall in realised gains available for distribution.

Robust recent performance
DBAG has continued to be active within the German market, having completed five new investments, increased its investment in Homag and completed three exits since the end of October 2012. Earnings growth and improving valuation multiples helped drive a 7.6% increase in the NAV (including dividends) during H113. The total expense ratio also fell during H1 and is expected to stabilise at c 3% in FY13e which is more in line with its European peers.

Portfolio recycling into newer stage investments
DBAG’s current portfolio is relatively young following a series of profitable realisations and successful fund-raisings. DBAG still has considerable funds of €123m in cash and cash equivalents and €700m in co-investment funds available for further investment opportunities. As a result, value creation over the short term is likely to be limited to earnings growth rather than realisations that generate higher returns as investments are generally sold at multiples above carrying value.

Gaining access to the German Mittelstand
DBAG has focused in recent years on mid-market German management buyouts (MBO) in its core Mittelstand market, a broad range of small-to medium-sized privately owned companies that have widely been credited with being a core strength of the German economy. DBAG believes substantial opportunities remain as less than 3% of the c 4,500 German companies in its target market have been approached by buyout sponsors, leaving plenty of room for future growth.

Valuation: Lower premium rating
The recent market turmoil has resulted in DBAG trading at a c 6% discount to NAV, which widens to c 17% once net cash of €123m and the listed investment in Homag (€44m) are excluded. Nevertheless, DBAG continues to trade at a premium to both peers (LPX Europe discount: 23%) and its historical average discount (13%).

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