Deutsche Beteiligungs AG (DBAN) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Deutsche Beteiligungs AG. At our customers request, this conference will be recorded. [Operator Instructions] May I now hand you over to Thomas Franke, who will start the meeting today? Please go ahead.

Good morning. Thank you for your interest in DBAG. We have published H1 figures this morning as well as the information that has been the final close of DBAG Fund VIII. For more details, I now hand over to Susanne Zeidler, CFO of DBAG. Thank you.

Yes. Good morning, ladies and gentlemen. It's my pleasure to present our half yearly financial report to you. The first report that was both entirely produced and reviewed by our auditor remote. Let me begin my presentation with the key message for our first month of the year. Despite the crisis associated with the novel coronavirus, we've been able to originate further commitments for our new DBAG Fund VIII in recent weeks, allowing us to successfully complete the placement process a few days ago. As far as our portfolio companies are concerned, I'll be reporting to you on various add-on acquisitions. The impact of the coronavirus crisis pushed net asset value of our private equity investments down significantly to EUR359 million as at March 31. Net income from Fund Investment Services showed a more pronounced increase than planned, rising to EUR3.5 million for the first 6 months of the financial year. And last but not least, we have prepared our new forecast for the current financial year, which I will be presenting to you in detail a bit later on. As is the case in the economy as a whole, all of our success at DBAG are overshadowed by the effects of the coronavirus crisis in the short term. On this slide, as usual, we summarized the most important financial indicators of DBAG Group and of both business segments. I will explain these in more detail as we go along. With significant commitment, we successfully procured placement of the new DBAG Fund VIII -- please skip to the next slide. Sorry, I don't -- yes, thank you. With significant commitment, we successfully pursued placement of the new DBAG Fund VIII which allowed us to close the fund just a few days ago with a volume of EUR1.109 billion, which is slightly more than our original targets. The fund will therefore secure our financial capacity to act and lay the foundation for continuous business development in the coming years. DBAG Fund VIII brings DBAG's assets under management or advisory to EUR2.5 billion. Since the end of the 2005 financial year, we have succeeded in increasing the volume of DBAG's assets under management or advisory by an average of 10.6% per annum. Income from Fund Services rose even stronger by 12.9% per annum. DBAG's own co-investment commitment for the new fund amount to EUR255 million and is also sets the course for growth in the Private Equity Investment segment. Like its predecessor, this fund also consists of a main pool and a top-up fund. The main pool will predominantly structure equity investments between EUR 40 million and EUR 100 million. Including the top-up fund, up to EUR 250 million can be invested per transaction, allowing us to continue putting larger companies and a broader market segment on our radar as well. This is only possible because we have made -- successfully invested the capital of the top-up Fund VII with 3 major investments, which are more than [ Mitts ], blikk and Cartonplast. [indiscernible] with fund investors is also evident in the fact that we managed to secure the terms of the predecessor fund, while at the same time also reaching an agreement on a number of new aspects that we have set out in detail on this slide. The investment period of 6 years in line with Fund VII gives us additional flexibility with regard to timing. 86% of the fund volume comes from investors who have entrusted to DBAG fund with their funds in the past. We're proud of this higher regard of our performance as an advisor. Investors repeatedly highlighted DBAG's particular expertise as an investor in the Germany, Austria and Switzerland region. Before the M&A market largely came to a standstill in March -- please go to the next slide. Before the M&A market largely came to a standstill in March, some of our portfolio companies were able to agree upon and conclude several add-on acquisitions. In some cases, this has enabled them to significant [ growth technique ]. These transactions include 2 acquisitions made by the radiology group blikk, a major takeover executed by duagon in Spain, and 3 acquisitions made by STG Group, which is now operating under new name, very complicated, Deutsche Infrastruktur- und Netzgesellschaft mbH, or shortly DING Group, and Netzkontor Nord having agreed and closed 2 add-on acquisitions, too. Immediately prior to the outbreak of the coronavirus crisis, vitronet reached agreements on 2 add-on acquisitions and also concluded a new loan agreement that will give it much greater financing leeway in the future. Most of the acquisitions were financed by the portfolio company using their own resources. The acquisition of the hospital Klinik Helle Mitte in Berlin by blikk was the only transaction that DBAG supported by providing equity of EUR2.5 million. Slide #7. Even before the general lockdown was imposed, we made the decision to live up to our responsibility for the health of our employees and business partners and to do our [ bit to have ] break the infection chain. We, therefore, switched to working from home as of March 13. Thanks to the extensive measures taken to digitalize our processes in recent years and the strong commitment of our staff, our business processes are still running smoothly. After brisk market activity in the period leading up to the end of 2019 and the variety of investment opportunities that rose in the first 2 months of 2020, new investments are currently proving difficult. Yes, we are still in discussions with business owners regarding equity investments predominantly on a bilateral basis and outside of auction processes. Our investment team already switched its focus to providing even more intensive support for our portfolio companies from the second half of March onwards. Slide #8. The crisis has clearly left its mark on the value of DBAG's portfolio, which currently amounts to only 0.9x the original cost. Overall, the situation is challenging but manageable. Both our moves to diversify our portfolio in recent years and its size are now paying off. Industrial companies currently tend to be under stronger pressure, in some cases even very strong pressure. Other companies such as growth in the broadband telecommunication sector and hardware sector are not affected at all. In particular, 90% of our portfolio companies in terms of portfolio value are either facing hardly any liquidity challenges or are in a position to overcome any challenges thanks to their solid financial resources. Only 7% of the portfolio value is attributable to companies that are at risk of being faced with a liquidity bottleneck, either in the immediate future or in the short term. It goes without saying that we are currently providing these companies [ with particularly close the quarter ]. It is crucially important to understand the impact of the coronavirus crisis on our portfolio valuation methodology in accordance with International Financial Reporting Standards. As a standard practice in the industry, we base our measurement on valuation guidelines issued by the Industry Association, IPEVs, which provide recommendations regarding measurement of portfolio companies and funds units of financial investors. The measurement as of March 31, 2020, had to take into account a special valuation guidance as we got the effect of the coronavirus pandemic issued by the IPEV Board. The aim was to stop the crisis from affecting the fair value of our equity investments via both lower multiples of peer group companies and at the same time, by learning -- lower earnings estimates. This would result in an inadmissible double-dip. Since the long-term results of our portfolio companies do not include effects relating to the coronavirus, we based the valuation on multiples in which the coronavirus effect was only reflected in the numerator, which is the share price, and not in the denominator, which is the earnings of the peer group companies. Consequently, we excluded a small number of companies for which analyst had already made downward adjustment to their earnings estimates from the peer groups as of March 31, 2020. In addition, we applied capital market multiples as of March 31, for 2 companies whose valuations had been based on multiples from recent transactions on the latest reporting date as these recent transactions do not reflect the drop in price level associated with the coronavirus crisis. Following the outbreak of the coronavirus crisis, we have also downgraded our expectations for economic growth in 2020 and onwards, and reduced expected sustainable earnings from some -- for some of our portfolio companies accordingly. The additional financing requirements of individual companies that I mentioned on the previous slide, we're taking into account in the amount recognized for their net debt. The net asset value of private equity investments fell from EUR472.1 million at the end of the financial year 2018-2019 to EUR359 million at the end of the first half of the current financial year. The decline was mainly due to impairments in the portfolio caused by the impact of the coronavirus. The reversal of carried interest had the opposite effect. Furthermore, dividends of EUR22.6 million for the previous financial year were paid out after the AGM at the end of February. In relation to the opening balance adjusted to reflect the dividend payment, net asset value was down by 20% as of the reporting date. Next slide, please. Slide 11 illustrates the change in the portfolio value, which dominates the development of financial assets. The additions were due to the closing of the 2 Cartonplast and DING Group transactions, both of which had been signed at the end of the previous financial year and related to DBAG Fund VII DBAG ECF. This progress related primarily to the completion of the sale of the next year in the first quarter of the current financial year. inexio that belong to the DBAG ECF portfolio, DBAG Fund V also sold its remaining shares in Romaco Group. We have not yet received the funds attributable to DBAG from the sale of inexio. This is the main reason behind the item other in the amount of EUR23 million. Our portfolio value is usually expressed as a gross value also including imputed non-controlling interests, which is largely carried interest. For the period under review, these claims still amounted to EUR22.9 million, differ by EUR17 million as a result of the massive losses in value during the second quarter. As a result, no carried interest was recognized any longer for DBAG Fund VI as at March 31. Net gains and losses on measurements and derecognition came to minus EUR93.2 million in the first half of 2019-2020. The collapse in stock market prices in the wake of the corona pandemic led to a massive decline in the multiples that we applied to the valuation of our portfolio companies resulting in value contribution of minus EUR47.3 million. 15 companies made a negative contribution and 6 made a positive one to the changes in earnings of minus EUR38.3 million. The positive contributors come from the broadband telecommunications focus sector, in particular. The fact that portfolio companies debt is up by EUR10.4 million is due to the financing of the add-on acquisitions referred to earlier, and to other companies increased financing requirements in the course of the coronavirus crisis. These 2 factors outweighed the deleveraging undertaken by a third group of portfolio companies. Our portfolio is broadly diversified by now. Our 4 core sectors only account for just under half of the portfolio value, that's close to 40% in the new focus sectors. As mentioned, companies in the broadband telecommunication sector are hardly affected by the coronavirus crisis, or not at all. Hence, their share in the portfolio value rose by 6 percentage points since the end of first quarter to reach 28% in the current reporting date. DBAG's co-investment commitments amounted to EUR86.2 million as at March 31, 2020. The available financial resources and the existing credit line cover all but EUR13.7 million of this amount. The investment entity subsidiaries have further financial resources in the amount of EUR18.5 million solely in cash and cash equivalents, some of which are to be distributed to DBAG in the future. These funds are also available for investments. As is always the case when a new fund is launched, the co-investment commitments are increased significantly by DBAG Fund VIII. The co-investment commitment for this fund amounted to EUR255 million. The commitments will only increase by this amount upon the start of the new investment period and income from Fund Investment Services will not increase until the fund's investment period has started. Our new long-term equity offerings meets the further demand. Net income from Fund Investment Services showed a more pronounced increase than expected from EUR1.8 million in the previous year to EUR3.5 million in the first half of the current financial year. Income from Fund Services was largely unchanged in the year-on-year comparison. The negative balance of our income expense items was down by EUR1.7 million year-on-year. This was due mainly to lower provisions for bonuses in this reporting period and to expenses for severance payments in the previous year that were not repeated in the reporting period. What is more we have since reduced [ totally ] duplicated head count in some positions. That brings me to what we expect to see going forward. It is still virtually impossible to predict how the coronavirus crisis will develop. As a result, our new forecast, which I will now go into in greater detail, is associated with even greater uncertainty than is normally the case. As things stand at the moment, we believe that the risks outweighed the opportunities. As in the past, our forecast is a qualified comparative one. We've also applied our previous forecast categories unchanged. As always, the forecast is also still subject to the proviso debt valuation levels on the capital markets were not have changed considerably by the end of the financial year compared to those levels on which the reference points were based, which are the multiples as at March 31, 2020. A dramatic impact of the coronavirus crisis in the first half of this financial year has prompted us to use different reference values as a basis for the forecast of those indicators particularly affected, which are net asset value and net income. Instead of the value as at September 30, or the average of the past 5 years, we use now the value as at March 31, or for the first half of this financial year. It is not only served to reflect account development but also results in narrow our forecast since the forecast level remains within one of the first stages of our forecasting system. Overall, this allows us to give you a clearer picture of our expectation. With this in mind, we expect the net asset value as at September 30, 2020 to be down slightly which means by up to 10% on the value as at March 31, 2020 to the amount of which was EUR359 million. As you can see, we anticipate a further weakening in the second half of our financial year. This reflects the risk overhang just mentioned. Nobody can tell just how severe and longer the burdens from the lockdown will be on economic development. Earnings from Fund Investment Services are substantially determined by the volume of funds. Given market weakness triggered by the coronavirus crisis, we currently no longer expect DBAG Fund VIII to start investing before this financial year is out and for us to start generating corresponding fee income for advisory services to that fund. Expenses for Fund Investment Services will be lower than the most recently expected, mainly due to lower bonuses. And all in all, we continue to expect Fund Investment Services to achieve a result that is up considerably, which means by more than 20% on the prior-year level of EUR3 million. From the comp perspective, it may well be more than double the figure for the previous year. In light of the impact of the coronavirus crisis, we made a decision last week to withdraw our previous dividend forecast. From today's perspective, our dividend policy remains unchanged in principal. It provides for a dividend that remains stable and increases whenever this is possible. This does not, however, will alter possibility that the dividend proposed may differ from that based on the broadening of the dividend policy in individual years that are affected by special circumstances. The factors influencing net asset value, as described above, tend to have the same impact on net income. We expect to see negative net income for the year as a whole that is like to slightly increased in terms of the absolute amount which means by up to 20% on the negative result of minus EUR76.7 million reported after the first 6 months. Allow me to summarize in conclusion. We are convinced that our company is well positioned for the time during and after the crisis. This laid a solid foundation for the satisfactory development of our business over the coming years with the conclusion of the placement of DBAG Fund VIII and our extended product offering, which now also includes long-term equity. Our investment portfolio is broadly diversified and we've since reduced the share of industrial business models considerably. The DBAG investment team has decades of experience spanning several investment and economic cycles, including the great financial crisis of 2008-2009. With this, I would like to thank you for your attention. And now, we are more than happy to answer any questions you might have.

Thank you.

[Operator Instructions] We've received the first question, it is from Igor Kim of Bankhaus Lampe.

This is Igor Kim from Bankhaus Lampe. I've got a couple of questions. First one, regarding the operating performance of your portfolio holdings do you think that in the second quarter the impact will be much worse than we have seen in the first quarter? I'm sorry, for you, it would be third quarter against the second quarter of the year? And the second question is on carried interest. Should we assume the same run rate on carried interest that we've seen in the first 6 months of your business?

Finished, Igor? Okay. Igor for your questions, which are all important, regarding the operating performance of the portfolio companies in the -- our third quarter, which is the second quarter of the calendar year 2020. I would like to say, that the lockdown of the economy started towards the end of our reporting quarter, which means the lockdown started in mid-March. So the only fear limited effects on the portfolio companies in the course of this reporting period. On the other hand side, you're aware of the fact that our evaluations are based on maintaining the earnings of the companies, which means that we have to take into account the longer reporting period than 2 weeks or 1 quarter. The evaluations are based on sustainable earnings of the company. The fact that we expect take into account that we'll see more risks than opportunities for the rest of the financial year is due to the fact that we cannot foresee so far how long will the lockdown be, what will be the further cause of the pandemic, how long does the lockdown, will we see a U or L or W in terms of recovery, will there be a second even sharper lockdown? And to take into account this uncertainty levels seen for the time being more risks than opportunities or chances, we expect a slightly further downturn in evaluations for the rest of the financial year of DBAG that, as already mentioned, this is highly unsecure but for the time being, we assume that it's better to be a little bit not too bullish on our expectations. Regarding carried interest, your second question, the provision we have to calculate for carried interest on each reporting date corresponds with the developments in our fair values of a portfolio and the respect in the font. So if in total the portfolio value increases, carried interest increase EBITDA, which means that our gross value increase is reduced by a certain amount by an increase in carried interest provision. And the opposite is the case if fair value is dropped down from the portfolio front. Does this answer your question?

Yes, it does.

At the moment there are no further questions. [Operator Instructions] The next question we've received is from Eggert Kuls of Warburg Research.

I have a general question regarding the private equity market flow. You pointed offsets, the market has come to a halt due to the corona pandemic. And on the other hand, going forward I can imagine there will be great opportunities for you because the market could change from a seller to a buyer market. And my question is on, can you already see that manageables for a company if you're interested in coming down and the opportunities to acquire interesting companies are growing up.

Eggert, thank you for your question, which is a very good question too. I refer to the development of the buyout and on leverage times on behalf of Slide 7 [ recently ], and I decided to show you this market development and talk about another tool give you -- in order to have the possibility to discuss the market impact of this crisis compared to the great financial crisis more than 10 years ago. There we saw a sharp decline in transaction volumes, and it was a sharp V, which means a very sharp increase immediately after the dropdown. The question for today is whether this will repeat in the current crisis we see in this pandemic crisis. And we do not know this. What everybody could expect is what you mentioned that prices may, that we will see increasing price volumes. But we will only come to a discussion on prices if there are any transactions on the market and this is currently the challenge that the new flow has dropped down significantly. I mentioned that practically no auction processes as of today, but that we are still negotiating or in talks with owners of businesses on a bilateral basis. And then we do not start negotiating or talking with the other party on prices. But what we expect, in fact, is that we are now entering into a market period where that could be especially need for our new product, which is long-term equity being financed only from DBAG's balance sheet. And for companies looking for an equity investor, staying even invested for a longer period of time and we feel very well prepared to take any opportunity in this area and expect and hope that prices will not be at a level than we actually met 1 or 2 years ago.

The next question from Stefan Scharff of SRC Research.

One question is the VII fund. The VII fund has now about 80% -- it's now full 80%. So is your targets, to say so, despite the challenging times at least to fully play the VII fund in the remaining 6 months? And the second question is, if you look at Slide 14, your liquid funds went down from almost EUR70 million to now EUR22 million. Do you have a projection or what's your projection for, let's say, the end of the year?

Good questions, too. Regarding Fund VII, yes, in our point of view, there is place for one further investment, which is DBAG Fund VII. And now I can get the opportunity to mention one of the several trends we were able to negotiate with the LPs and DBAG Fund VIII. In the past, we were only able to start investing in new funds once investments priorities predecessor fund was fully invested. Now, we are able to change fund chance in a way that we are able to start investing Fund VIII even the predecessor fund is not fully invested yet. We might take this opportunity, for example, in a case where we see an opportunity, an investment opportunity, which requires a higher equity investment that is still being possible with the remaining equity during the DBAG Fund VII, for example. And once DBAG Fund VIII will make it's first investment, the investment period starts upon our decision as an advisor to this fund. And from this point of time, only they will receive the management fee income. So this is an important change from our point of view with respect to the fund terms. Regarding the market, we are not -- you might remember that in the past, we assume that the last investment by DBAG Fund VII will be done during the first half of the financial year, and that the first investment of DBAG Fund VIII will be in the second half of the financial year. And, I tried to point out recently that we postponed those investment due to the current market environment, where we don't see a significant deal flow. So I don't know. Yes, as I had already mentioned we are in bilateral situations that are going to be need to an investment for Fund VII or Fund VIII or for our long-term equity from our own balance sheet, I don't know. As always, high uncertainty, until you've signed the contract all the plan is uncertainty.

Is it would be possible to start VIII and fully...

It would be possible to draw capital from Fund VIII because Fund VII is fully invested. This is possible under the new terms of Fund VIII and this has not been possible in prior generations of prior funds. As new term which brings for us more flexibility which is very appreciable, I assume. Regarding the liquid funds, I expected a question in this way. Yes, if you look at the financial results as at March 31, this does not look very comfortable and as we work very hard during the past weeks and months on finalizing fundraising for the new buyout fund, we are at the same time very busy in terms of funding for the DBAG's balance sheet and there are different -- our financial strategy, there are different options and we are approaching them intensively and are well prepared once the financing and the capital markets will be ready to offer opportunities. So that is very -- that was a very large product for us as of today. And for the time being, we have in combination with our assumptions regarding the investment opportunities we feel comfortable with liquidity we had in own balance sheet and in the structures, which we can draw down to DBAG's balance sheet, and which amount including our credit line of -- to nearly EUR100 million. So by the end of the year, this will be less than EUR100 million but as long as we don't want to negotiate 2 or 3 opportunities once in a second, we will be fine.

Okay. The cash situation or liquidity is the point as you can see in Slide 8, that's almost 20% of the companies are with the, let's say, liquidity shortage or short-term liquidity shortage. So let's see how the situation develops as your portfolio companies in the second half of the year. So nobody knows except...

Yes. But now I talked about DBAG's liquidity position, I understood the question in this direction, the liquidity situation of the portfolio companies is another issue. There are -- I mentioned that some of the companies are in negotiations with their banks. And of course, if necessary, DBAG will attack companies in those cases, well, it is necessary as we did in the past.

The next question is from [indiscernible] of HMA Investment Banking.