Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
6. Uncovering Trusts – Deutsche Beteiligungs
43 Plays6 months ago
In this episode, our director of content, investment trusts Milosz Papst dives into Deutsche Beteiligungs and its unique business model as an investor and asset manager focused on the private equity mid-market in the DACH region (Germany in particular) and neighbouring countries. He discusses the company’s portfolio shift in terms of sector exposure, as well as its latest entrance into the private debt business. He also talks about the company’s track record and its policy on dividends and buybacks.
***********************************************************
About Uncovering Trusts
The Uncovering Trusts podcast is run by Edison analysts and released every two weeks. Subscribe to hear analyst talk about how investment trusts maximise returns while managing risks for investors.
About Edison
Edison is a content-led IR business. We believe high-quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts. Read about them here: www.edisongroup.com
Recommended
Transcript
Introduction to the Podcast and Guest
00:00:04
Speaker
Welcome to Uncovering Trusts, a podcast by Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and the latest developments of a selected investment company. So tune in and find interesting investment ideas and to stay on top of what is happening in the investment company sector.
Discussion on Deutsche Betelgungs
00:00:27
Speaker
I'm your host, Suki Thompson, and today I'm joined by Milos Pappes, Director of Investment Trust Content at Edison Group, who will take us through Deutsche Betelgungs. Tika Diebe. Milos, thanks for joining us today. Hi, Suki. Thanks for having me. You've told me before the show that this time you'll cover something completely different than in the previous episodes. Can you shed some light on this?
00:00:51
Speaker
Yes, indeed. Deutsche Betalligungs is different than the previous investment companies we covered on the podcast for two reasons. Firstly, it is a Frankfurt-listed private equity business operating the Dach region, in Germany in particular, and neighboring countries such as Italy. Secondly, it has two complementary business lines.
00:01:09
Speaker
private equity investments and asset management built around the DBAG funds it manages through which it also invests alongside third-party investors. Its current third-party assets and the management stand at around 1.9 billion euros. Therefore, it offers the prospects of both private market investment gains and fee income.
Private Equity Strategy and Business Lines
00:01:29
Speaker
And can you tell us more about the company's sweet spot in terms of investment targets?
00:01:34
Speaker
Sure, the company focuses on the private equity mid-market, which I believe offers several potential advantages over private, large or mega-cap investments. Firstly, many of the acquired companies have not been owned by a private equity investor before, and may therefore represent a low-hanging fruit in terms of value creation. That is, operational improvement.
00:01:57
Speaker
The Jupiteriums can be considered one of the go-to partners for private company owners. I believe this is well illustrated by the fact that 60% of its buyout investments between 2013 and 2023 were businesses acquired from families and founders, which is ahead of the 52% for all German mid-market buyouts.
00:02:17
Speaker
Secondly, portfolio exits are less dependent on the IPO market. In fact, Deutsche Betalligungs rarely uses IPO as an exit route, and two thirds of its exits were historically to trade buyers. Finally, mid-market deals are less reliant on funding through the syndicated loan market, which was muted last year, and also often involve less leverage compared to lateral megabytes.
00:02:41
Speaker
Thanks. And how about its sector exposure?
Sector Diversification and Risk Management
00:02:44
Speaker
Does it mirror the composition of the German economy? That's a good question, especially given that the industrial sector represents an important pillar of the German economy. Historically, the company's portfolio largely reflected the German industrial mid-market, with industrial businesses making up around 80% of its portfolio in FY15.
00:03:03
Speaker
Since then, the company has consistently increased its exposure to other sectors like IT services and software, broadband and telecommunications, and healthcare. These provided a caution against the macroeconomic headwinds that have been affecting the company's industrial portfolio since 2019. The share of these so-called growth sectors in the company's portfolio stood at 42% as at the end of September 2023. Can you also tell us about the company's portfolio of industrial
00:03:33
Speaker
Absolutely. I think it is worth discussing this as well. The company's industrial portfolio has also changed over time. For instance, at the end of September 2023, only two of the company's top 15 holdings had significant exposure to the automotive sector, while the other industrial holdings in this group represent a diverse set of business models.
00:03:52
Speaker
This includes, for instance, Congatec, an industrial technology company focused on high-performance embedded computer products. Cartonplast, a provider of a pool system for the rental of reusable plastic layer pads. Danturm, a provider of heating, cooling, drying, ventilation and air cleaning technology.
00:04:12
Speaker
Then there is also MTWH, a manufacturer of metal applications for the luxury goods industry, and Duagon, a provider of network components for data communication in railway vehicles. Moreover, I think the company's recent acquisitions illustrate the gradual shift away from the traditional capital goods sectors towards energy transition and sustainability plays, which often have a more defensive profile.
00:04:38
Speaker
super helpful.
Expansion into Private Debt Market
00:04:39
Speaker
And I believe that the company recently also entered the private debt business.
00:04:44
Speaker
That's correct. In September last year, it announced its entry into the private debt segment through a strategic partnership with ELF Capital, a manager of credit funds. The company acquired a majority stake in ELF Capital Group with a plan to gradually increase its stake to 100% over the next five years. The group includes ELF Capital Advisory, a private debt asset manager with around 200 million euro of assets under management into credit funds.
00:05:12
Speaker
Its flagship fund focuses on straight, senior-secured private debt, targeting a return of around 7-8% per annum, while its credit solutions fund has a more flexible mandate, covering highly structured investments, including hybrid capital and structured equity investments, with an expected return of around 14-16% per year.
00:05:33
Speaker
Moreover, Deutsche Betelgens plans to co-invest around 100 million euros in ELF capital funds as a limited partner, which will be a similar approach to its co-investments alongside DBEG funds. So I guess this provides the company with quite a broad range of funding solutions for private companies.
00:05:52
Speaker
Yes, the company's structuring options range from, well, traditional buyouts of majority stakes through smaller buyouts, long term investments executed entirely from the company's own balance sheet up to private debt investments. I would note that the private debt market developed strongly last year as it gained market share from the syndicate loan market. And this was coupled with significant inflows of institutional capital into this asset class.
00:06:18
Speaker
Great.
Historical Performance and Recent Exits
00:06:19
Speaker
I think now is a good moment to discuss the company's performance track record. Agree. So let me start with its long-term performance. Since 1997, when it structured its first buyout, the company has financed 60 paid buyouts and made 19 minority growth financing investments. Out of this, 41 buyouts and 16 growth financings were realized in the full or mostly, generating a healthy multiple of invested capital of 2.7 times and 2.9 times, respectively.
00:06:48
Speaker
A notable realization announced last year was the scale of the provider of technical building services, R-plus-S, which is the company's first exit from its long-term investment portfolio. That is, a portfolio of investments made entirely from its own balance sheet. Deutsche Bedeigungs decided to realize the investment after a relatively short-holding period of around two years, encouraged by the attractive price offered by a strategic investor, Nokera,
00:07:14
Speaker
translating it to an IRR of over 40% since March 2021. Part of the R++ exit proceeds was reinvested in the minority stake in Nokia, which is a producer of buildings in serial and sustainable construction and positions itself as the largest technology-enabled platform for serial timber production.
00:07:34
Speaker
Moreover, Deutsche Betelgungs has just announced the disposal of Intech, a provider of technological and process consulting, engineering services and software development, with a
Current Financial Performance and Economic Challenges
00:07:43
Speaker
significant uplift to previous carrying value. Thanks. And how about its returns after accounting for the change in value of businesses which haven't sold yet? Yeah. So the company increased the value of equity invested by 1.9 times for buyouts and 2.7 times for growth financings.
00:08:00
Speaker
The current portfolio is held at around 1.1 times cost on average, so a much lower ratio than for the realized investments. This comes from the fact that private equity portfolios are obviously a blend of different investment advantages and each successful disposal in line with the targeted return normally reduces the average unrealized multiple of cost across the portfolio.
00:08:23
Speaker
That said, the lower multiple currently is also due to the, well, demanding macroeconomic environment for some of its industrial holdings. That said, I would note that overall the company was able to make several exits in FI23 despite muted global M&A markets. This, together with an expansion of public multiples, allowed it to deliver an 18.1% enough total return in FI23 in newer terms.
00:08:49
Speaker
However, if we look at its returns over the last five years, they are below the average of UK listed private equity investment trusts, given the headwinds experienced by the German economy. Understood.
Dividend Policy and Shareholder Value Initiatives
00:09:01
Speaker
And how about the company's distribution policy?
00:09:04
Speaker
The company has updated its dividend policy in November 2023 and now aims to pay out a stable dividend with a minimum payment of €1 per share, which is also management's pay of recommendation for FY23 and currently represents a quite attractive dividend yield of around 3.7%. Great, thank you. And does the company perform any buybacks?
00:09:27
Speaker
The company's approach to shareholder distributions shifted recently from a pure dividend policy to a broader distribution policy, as management highlighted that it would consider buybacks on a more regular basis. It has recently launched a buyback program of up to 20 million euros, which will involve the repurchase of up to 800,000 shares, which represents around 4.25% of its share capital.
00:09:52
Speaker
Importantly, the company now trades at a double-digit discount to NAF. This is despite the fact that its net asset value does not account for the value of its asset management business. It captures primarily its private equity investment portfolio. Therefore, the current share buybacks are NAF-accretive. I believe that if the company can deliver a high level of realizations in the coming years, it should be able to cover the capital calls related to its fund commitments and, at the same time, continue to deliver meaningful distributions to shareholders. Thank you, Milosz.
00:10:23
Speaker
You've been listening to Uncovering Trusts, a podcast by Edison Group. If you would like to find out more about Deutsche Botelagungs and other investment companies we cover, please visit EdisonGroup.com.