Deutsche Beteiligungs AG (DBAN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I would like to start with Slide #4 -- 5 directly. We've all been talking about one topic this year. I will address it right at the beginning of my comments from the 2020 financial year now concluded, before turning to a brief overview of the most important events and the financial year results. Let me tell you this, the COVID-19 crisis is not a thing of the past for DBAG either. However, all in all, the consequences are manageable. Not all our portfolio companies are negatively impacted by the pandemic. In fact, some of them have even benefited. Importantly, we have only had to spend EUR 5.2 million in additional equity to allow for debt financing solutions at 7 portfolio companies for crisis management purposes. Like many other market participants, we realized during the pandemic that digitalized business processes offer many advantages. During the financial year, on the revenue, we invested more than ever before. So my last comment on this slide, during the financial year under review, we invested more than ever before. Given the circumstances, this may be a surprise, but we choose carefully and will continue to keep the pandemic at the back of our minds in the upcoming months. I will get back to this at the end of my speech. Now Slide #6, please. The launch of the DBAG Fund VIII in May was very successful. With great commitment, we pursue the placement during the first lockdown. The volume of EUR 1.109 billion is slightly above our original target. This one secures our financial capacity to act and lays the foundation for continuous development of our business in the coming years. DBAG Fund VIII brings DBAG's assets under management or advised to EUR 2.6 billion. Since the end of the 2005 financial year, we have succeeded in increasing the volume of DBAG's assets under management and advisory by an average of 11% per annum. And income from Fund Investment Services rose accordingly. DBAG's own co-investment commitment for the new fund amounts to EUR 255 million. As a result of Private Equity Investments segment [indiscernible] on its way to generating growth. Like its predecessor, this fund also consists of a principal fund and a top-up fund. The principal funds were predominantly structure equity investments between EUR 40 million and EUR 100 million. Including the top-up fund, up to EUR 220 million can be invested plus transaction, allowing larger companies and a broader market segment to appear on our radar as well. The [indiscernible] we enjoy 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. The investment period of 6 years is in line with Fund VII, gives us additional flexibility with regard to timing. We are proud of this high regard for our performance as an adviser. Investors repeatedly highlighted DBAG's particular expertise as an investor in the Germany, Austria and Switzerland region. DBAG's investment team made investment decisions in the amount of EUR 314 million in the financial year under review. Three of these concerned management buyouts that were structured for the new funds within the first 2 months of its investment period. Other transactions included a further MBO with DBAG Fund VII and the first long-term investment -- minority investment in a fast-growing company, financed exclusively from DBAG's own balance sheet. Six portfolio companies have posted strong growth through a total of 14 add-on acquisitions. These acquisitions, predominantly financed by the portfolio companies themselves, serve to accelerate the implementation of their respective strategic development. DBAG financed EUR 96.8 million of the investment decisions made from its own resources. As reported, this is significantly more than in recent years. One company was sold in full, and we achieved the successful partial sale of another investment, the first one was Rheinhold & Mahla; the second one, Pfaudler. In light of the economic environment, this is also remarkable. Now Slide #7, please. This one is about the expansion of our equity solutions platform for the mid-market segment a year ago at that time under the heading balance sheet investments. Recall, these investments that we do not finance alongside the DBAG Fund are now long-term investments since we believe that this time it's better understood by all interested parties. What is this all about? This offer is also aimed at mid-market companies recognizing the fact that time and again family owners are looking for a co-investor with a truly long-term perspective. Especially in the prevailing economic environment, we are seeing a large number of opportunities popping up to invest in companies facing exceptional situations. For example, peripheral businesses of large corporations with a good market position and a tried and tested business model but which have been thrown off course by the consequences of the pandemic. The government loans and short-term working arrangements offer short-term relief. However, it takes equity with its long-term availability and a solid capitalization to generate sustained success. We talked about decision to expand our investment team in 2020. Between the 2 reporting days, the team grew up by 4 people. Another colleague has joined us in the new financial year, and we aim to continue expanding. So far, you have known DBAG as an investor largely invested in the German Mittelstand and in a few individual investments in Austria and Switzerland. However, we've also been active in the Italian market for several years, and we are establishing a network, targeting industrial companies in our core sectors, including mechanical and plant engineering as well as manufacturers of industrial components. In August we structured our first Italian management buyout, PM Plastic Materials, and are planning to make further investments in the region. Changes are being made to DBAG's Board of Management. Two new colleagues will be joining [ to our severe need ] with a long-term partner will be leaving the Board of Management but not DBAG altogether. The Supervisory Board appointed 2 experienced members of the investment team, Tom Alzin and Jannick Hunecke, as new members of the Board of Management. They will take up their new roles on March 1, 2021. We informed you about this on Friday. We have, of course, already had the opportunity to get to know them during our Capital Market Day. My colleague, Rolf Scheffels will step down from the Board of Management at his own request when his contract expires at the end of February. However, he will remain closely linked to the company as an investment advisory committee member of the most recently launched DBAG Fund. Tom Alzin and Jannick Hunecke has held management responsibility and being influential investment team members for many years now. Both can look back at a series of successful transactions. This concludes my comments on the most important events of the financial year under review and the day-to-day changes. Now Slide #8, please. I alluded earlier to the pandemic, which broke out 5 months after the start of the financial year. It brought economic activity to an abrupt halt across the globe, inflicting temporary paralysis in some cases. The pandemic initially triggered a slump on the capital markets, resulting in significantly lower valuation multiples in what was likely to be a materially negative multiple effect on net measurement gains and losses at the half year mark. Therefore, we retracted our original forecast for the reporting year on 20 March 2020. The net asset value of our Private Equity Investment segment fell by EUR 50.1 million, taking into account the dividend distributed of EUR 22.6 million. This represents a 5.8% decline of the value for the previous year, largely due to the negative change in the value of the portfolio. The Fund Investment Services segment was also affected albeit only indirectly. The M&A market came almost to a standstill at times, forcing us to postpone the start of the DBAG Fund VIII investment period. Thanks to the encouraging investment progress that followed, the investment period of the new fund began later than originally planned, but at least before the end of the financial year in August. Net income from Fund Investment Services has even been able to meet initial expectations, and we retracted our forecast in March that also apply to the dividend. We do, however, stay true to our dividend policy, albeit suspending it for this crisis year. The dividend proposal mainly considers the expected later proceeds from the portfolio as a result of longer holding periods for our industrial investments. With the proposal of EUR 0.80 per share, we achieved a comparatively attractive dividend yield, which is also an important element of our dividend policy. I will come back to this in more detail later. Let us turn to the details of the Private Equity Investments segment. We managed this segment via net asset value. Both net asset value and net income from investment activity are materially influenced by the performance of our portfolio companies and by the capital markets. Especially in light of the capital market development, the second quarter value was significantly lower but picked up again in third and fourth quarters, thanks in part to the market recovery, but also thanks to the successful disposals already mentioned. The net asset value was not able to fully compensate for the COVID-19-induced setback. However, EUR 22.6 million of the total decrease of EUR 50.1 million is attributable to dividend payment in February. This slide 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 concluded at the end of the previous financial year and related to DBAG Fund VII and DBAG ECF. In September, we were still able to close 3 of the recently agreed MBOs and the first long-term investment. These 4 transactions account for another larger portion of addition. An amount of EUR 14.6 million is attributable in line with our investment approach for this fast-growing company to the capital injection for DNS:NET, which was also associated with the increase in the equity investments. The disposals related primarily to the completion of the sale of inexio in the first quarter of the financial year under review; in next year, belonging to the DBAG ECF portfolio. Furthermore, DBAG Fund V sold its remaining stake in Romaco Group and netzkontor nord was recapitalized, which is also reflected in disposal. I will elaborate on the details of the change in value later when I'm addressing the portfolio in more detail. Our portfolio value is usually expressed as a gross value, also including imputed noncontrolling interests, for example, largely carried interests. At the end of the period under review, this carried interests amounted to EUR 31 million. Normally, we report neither revenue nor earnings losses, at least not for the portfolio as a whole. This year is different. Our portfolio companies were unable to escape the impact of the pandemic, even though a few of them benefited. The revenues reported by the 25 companies that we had in our portfolio at the beginning of the financial year have fallen by 3.5% in total. A drop in revenues of 14% is attributable to the companies with links to manufacturing industry, whereas the revenues reported by companies from the new growth sectors increased by 34%. Company acquisitions played an important role, with 27 percentage points of the additional revenues attributable hereto. The earnings development paints a similar picture. We derived this indicator from the weighted average EBITDA of the 25 companies that we already had in our portfolio at the beginning of the financial year under review. To this end, we mainly took our anticipated earnings for 2020 as a basis. Our expectations reflect the pandemic's impact. The average weighted EBITDA for the 25 companies was down by 10.7% year-on-year overall. The drop would have been more pronounced if acquisitions have been left out of the equation. Companies with links to manufacturing industry contributed minus 32% to the development of the weighted average, whereas companies from the new growth sectors were able to increase the EBITDA by 18%. Once more, company acquisitions contributed to this development. At the end of September 2020, debt levels of our portfolio companies averaged 3.9x the expected EBITDA. We calculate this indicator based on the debt levels that the companies expect to have at the end of the year. Companies with links to manufacturing industry had debt corresponding to 3.6x their EBITDA compared with a multiple of 4.4 for companies from the new growth sectors. In this context, the extensive self-financing of company acquisitions by the portfolio companies, which initially increased debt levels, needs to be noted. The higher leverage is largely due to markedly lower earnings expectations in some cases. Regarding the topic of multiples at the most recent reporting date, peer group multiples were mostly higher than 1 year ago. However, the increase in the average valuation multiple of 7.8 as at the previous reporting date to now 8.8 is not only due to higher peer group multiples, but also to the once again adjusted portfolio structure. Business models, which tend to be valued at higher multiples like broadband telecommunication or IT services have gained even more in importance. As at the reporting date, the total portfolio was valued at 1.1x acquisition costs. Only at 1.1x is the right expression really. Because relative to historic levels, this is a very low value. It is a long way from the multiples, which we were able to realize for sales of our investments in the past, which grew between 2.7 and 3.4 for NPLs and growth investments, respectively. As already announced 1 year ago, the total portfolio was valued at an average of 1.24x acquisition costs. First, we once again differentiate between industrial companies and the new growth sectors. Within these 2 groups, companies report very different developments. As such, the negative performance reported in the financial year under review is largely attributable to 8 portfolio companies with links to manufacturing industry, of which 4 are directly or indirectly linked to the automotive industry. As at the reporting day, these 8 companies are valued at only 0.56x initial transaction costs. We can probably assume potential for value appreciation there. This overall development also implies that our portfolio must comprise companies that have enjoyed very favorable development. The negative contribution made by the change in earnings at our portfolio companies relates primarily to our investments linked to manufacturing industry. We now expect the reluctance to invest in a large number of sectors to continue to put a damper on industrial demand. Demand has also waned among companies offering consumer-related products and services, although we do not expect these adverse effects on earnings to be sustainable. The impact on companies in the IT services, software and broadband telecommunication sectors is still comparatively minor [ as the crisis has effective plan at all ]. The valuation multiples of listed peer group companies showed varying developments in the course of the financial year, although as mentioned, most of them were higher than as of 30 September 2019. For example, in the case of investments in the mechanical and plant engineering and automotive supply sectors. Investments from the broadband telecommunications sector, on the other hand, they're valued based on lower multiples. Furthermore, the financial year 2020 also brought an appreciation in value resulting from implied multiples, which in the case of disposals agreed upon but not yet completed in full we derived from agreed disposal prices. This resulted in a value contribution of EUR 9.4 million. In balance, the effect on multiples attributable to investments not sold amounts to EUR 57.4 million. We also reached an agreement with DBAG Fund VIII to co-invest alongside this fund. The commitment is for due in the course of the fund's investment period of up to 6 years. As with the other DBAG Funds, we expect to be able to finance a significant part of the commitments using returns following the disposals from the portfolios of previous funds. However, in light of the current environment, we expect these returns to occur later than initially planned. Then there are also the funds required for long-term investments, which we aim to make independently of DBAG Funds. Therefore, we have extended our debt financing options in the financial year under review. We have arranged another credit line of EUR 40 million, and thus, have now EUR 90 million in credit lines at our disposal until May 2023, which we can draw upon to compensate for the irregular cash flows that typically result from our investment business. As at 30 September 2020, DBAG's financial resources totaling EUR 18.4 million exclusively comprised cash and cash equivalents. The units in fixed income and money market funds in the amount of EUR 25.5 million that we held on the previous year's reporting date were sold during the course of the financial year to finance investments. Cash and cash equivalents totaling EUR 13.1 million relate to drawdown of credit line. Investment entity subsidiaries hold additional financial resources, exclusively cash and cash equivalents, amounting to EUR 4.2 million. In addition, we can draw upon at least EUR 16 million from deferred fees for advising DBAG Fund VII. The financing requirements resulting from our midterm planning for the current financial year and the 2 following financial years is significantly higher than the outstanding co-investment commitments alongside the DBAG Funds last year. We have now taken into account the investments alongside the funds and the planned long-term investments in the planning period up to 2023 no longer as previously all open co-investment commitment. As mentioned, we've extended DBAG's financial scope by EUR 40 million by taking out another credit line. In lieu of the high investment volume planned, if returns from the existing portfolio expected late, we are also still exploring various options for debt and equity financing. Let us take a look at the Fund Investment Services segment. I already informed you about the DBAG Fund VIII. At this point, I would like to draw your attention to one detail to prevent later a misunderstanding. So far, the start of a new investment period automatically meant that the previous fund's investment period had come to an end. For DBAG Fund VIII, this is different. Why is that important? It allows us to fully exploit the potential of DBAG Fund VII. To date, 77% of the fund has been invested. The amounts remaining have been reserved for potential company acquisitions of existing investments and management fees. However, should funds flow back following the disposal of an investment, we can invest further from this fund until 100% of the committed funds have actually been deployed. This way, we optimize the fund's potential for value appreciation on the one hand; and via the higher invested capital, the calculation basis for advisory fees on the other. In addition to these overlapping investment periods, we were also able to achieve improvements with our most recent fund raising in other areas. We now receive advisory fees of 1.5% on investments of the top-up fund, which was previously 1%. Advisory services provided to the DBAG Funds by our investment team are [ bundled ] in the Fund Investment Services business segment. DBAG has paid a volume-based fee for these services, so income projections can easily be made. DBAG's earnings base increases after fundraising for a new fund has been completed successfully, as was the case with the current DBAG Fund VIII during the financial year under review. Income from Fund Investment Services acts as a key performance indicator for the financial target with the value of Fund Investment Services. This result has significantly improved in the last financial year. First of all, income benefited from the new DBAG Fund VIII and, to a lesser degree, from higher income from DBAG Fund VII and DBAG ECF. Fees for DBAG Fund VI declined as expected after disposal. Fees are no longer paid for DBAG Fund V as agreed with limited partners in this fund. Expenses were significantly lower than in the previous year. In addition to the lower travel and hospitality expenses during this COVID-19-affected year, lower performance-based remuneration across the entire company, including the Board of Management, made itself [indiscernible]. You know our dividend policy. We defined it in 2016 and have applied it consequently 4 times since. We were able to offer our shareholders, for example, approximately 15,000 private individual shareholders, family offices, numerous foundations and many other institutional investors an attractive dividend yield. In this exceptional year, after careful consideration, we've decided to suspend our proven dividend policy. In particular, the fact that the returns from Private Equity Investments are later than originally expected due to the economic developments and the funds required for the planned investment program, which has not yet been fully financed, argue against distributing a dividend for 2020 that is stable compared to the previous year. We are sure that our dividend proposal takes a balanced approach to each aspect in the context of the pandemic and that our shareholders understand it for what it is, a reaction to a highly [indiscernible] challenge. Against this background, we are all the more pleased to be able to announce a return to our previous dividend policy for the new ongoing financial year. We've incorporated a dividend of between EUR 1 and EUR 1.20 per share in our planning for 2021 and beyond. As you know, we have defined 3 financial and 3 nonfinancial targets that are designated to contribute to our full corporate objective. The 3 nonfinancial targets are as important as the financial one. As such, we have to gain access to attractive investment opportunities if we want to invest our own funds and those of our fund investors in a value-enhancing manner. In the financial year under review, we succeeded. I already mentioned more than 5 newly structured equity investments despite the fact that the transaction market came to a virtual standstill between mid-March and June, a development which resulted in a significant decline in investment opportunities. In contrast of the number of investment opportunities, the following indicator is not updated every year. The percentage share of capital commitments to a fund by investors in earlier DBAG Funds shows how they value our performance to date. We launched a new fund in 2020, and 86% of funds came from investors in earlier funds. Importantly, we are not necessarily aiming for 100%. We are continuing to shape our investor base. We measure whether we have succeeded in retaining experienced employees on the basis of the average length of service. As you can see on this slide, we succeeded in doing so during the year under review. What do we want to achieve in the new financial year and beyond? First of all, I would like to inform you about a change in our type of forecast. Increasing number of portfolio companies means that an individual portfolio company has less and less of an impact on the success of a financial year. As a result, we can now be more precise in our forecast as we do in the past. In future, we will be releasing an interval forecast for the key performance indicators. In the past, our forecast was limited to a qualified comparative forecast on the expected development of these indicators. We think that this will also make your work easier. The interval ranges for these indicators included in the forecast are based on the varying degrees to which they can be planned. Income from Fund Investment Services is largely predetermined for the forecast period, making it easy to plan. As a result, we are forecasting this indicator using a narrower range and for the development in the net asset value or other KPIs for the Private Equity Investment segment. That was all on the methodological changes. The slide shows the specific values. I would like to take a closer look at individual elements of the forecast for the 2021 financial year in a minute. This forecast is based on our current midterm planning until 2023. We published first figures within the scope of the Capital Markets Day in September. As usual at this time of year, we have now adjusted the plan based on the actual figures for 2020. While the slide has no disclaimer, let me tell you, the forecast is once again subject to significantly greater uncertainty than in previous years due to the overall environment. This uncertainty adds to the fact that our plan is always based on the assumption of constant multiples. We expect the consequences of the pandemic in particular, but also trade conflicts or Brexit to continue to put pressure on a large number of economies. This will also impact our portfolio as a whole, even though our portfolio companies operate in a large number of different markets and regions with influencing factors that overlap and, in some cases, offset each other. This means that the financial year 2021 is likely to be more of an average year measured against a 10-year average. The forecast range for the net asset value as of 30 September 2021 is a good indicator. It shows an increase of between slightly more than 1% up to an increase of 12%, taking the dividend proposal into account. The following years are expected to turn out significantly better. For example, in the financial years 2022 and 2023, growth is expected to be materially higher, resulting in an average increase of between 14% and 19%. These anticipated growth rates include the planned distribution. Income from Fund Investment Services surged in the financial year under review, reaching a record high since we introduced segment reporting in 2014. It is anticipated to show another surge, reaching a double-digit million euro range in the next 3 years. The decline in the third year of our midterm planning will be the result of a lower earnings base due to planned disposals before positive growth can be expected again with another fund at present beyond the planning horizon. Before I turn my and your attention to the outlook, I would like to report a further important development of our target system in the current financial year. Deutsche Beteiligungs has always been committed to the principles of sustainable corporate conduct. This is consistent with the long-term nature of our business that we take responsibility for the impact that our decisions have, both now and in the future. This includes the decisions we make in the investment process, in the development and subsequent [ exposure ] of our portfolio companies and in managing our company. We now also make this aspiration clear in our core corporate objective. We now aim to sustainably increase the company value of Deutsche Beteiligungs. By this, we mean achieving a long-term increase in DBAG's company value with taking ecological, social and governance assets into account. Accordingly, we are aiming from now onwards to also regularly provide you with quantitative information on these aspects to show you where we stand and how we are progressing. In this case, when I say we, I mean Deutsche Beteiligungs and the portfolio companies. I'm coming to the end of my presentation. And in conclusion, I should like to point out 3 aspects. Firstly, our company has developed successfully. We are well positioned to exploit investment opportunities, especially in the current environment. We do not wish to invest solely in a view of a possible economic recovery, and the ability to predict the extent of a pandemic-induced impact is crucial. Our requirements as to business model, quality, its strategic importance and market growth remain high. Investments in industry tech companies as well as in the new growth sectors, IT services, software and broadband telecommunications, are potential candidates. Secondly, our portfolio is broadly diversified. Some industrial companies presently have a very low valuation level, and therefore, offer upward potential. In other companies that we change processes are at a very advanced stage, so that we can start thinking about disposals. We are seeing interests in such companies from strategic investors. Thirdly, it does have the prerequisites for attractive growth in both segments. All of this leads us to firmly believe that Deutsche Beteiligungs will continue to evolve in 2021, so that we create value not only in the long term, but also sustainably value for shareholders and our company's other stakeholders. With this, I would like to thank you very much for your attention. Stay healthy. Bye-bye.