OBJECTIVES, STRATEGY & STEERING
OBJECTIVE: TO SUSTAINABLY INCREASE THE VALUE OF DBAG
The core business objective of our activity is to sustainably increase the value of Deutsche Beteiligungs AG. We achieve this by generating value contributions from both of our lines of business, which influence each other reciprocally and positively: since DBAG co-invests alongside its funds, the performance of its investment activity also contributes to the success of its fund services business, because a track record of excellent performance for existing investors is crucial when raising new funds.
As is common in the private equity sector, the measure for our performance is a period of ten years. Support for portfolio companies in their development is limited in time; our portfolio is therefore subject to constant change. This, and the influence of external factors on value growth, could entail strong fluctuations in performance from year to year. Income from fund investment services is significantly influenced by the raising of new funds, which occurs approximately every five years, while the lifetime of a fund extends to ten years. Only when viewed over a sufficiently long period of time is it possible to assess whether we have reached the core objective of our business activity. We measure an individual year's performance contribution by comparing it to a ten-year average. On average over this ten-year period, we aim to increase the equity per share by an amount that significantly exceeds the cost of equity.
Value contribution by Fund Investment Services
The performance of the Fund Investment Services business line requires an appreciable, preferably increasing level of managed and/or advised assets over the medium term. It is measured by sustainable growth in fee income for these services and the surplus over the expenses for this business line.
Increasing the value of the portfolio companies
The business line of Private Equity Investments delivers the greatest value contribution. The value of DBAG is therefore determined, first and foremost, by the value of its portfolio companies. DBAG supports its portfolio companies during a phase of strategic development. Value that is built over that period is mostly realised when the investment is exited – in certain instances also by way of ongoing distributions. The targeted annual increase in the equity capital value of a portfolio company (IRR, internal rate of return) is approximately 20 percent for expansion financings and 25 percent for management buyouts.
Shareholders to participate in performance
We want the shareholders of DBAG to participate in the Company’s performance by way of stable dividends which, whenever possible, will increase. By the nature of our business model, investments may predominate in some years and disinvestments in others. In years of sizeable gains from profitable realisations, future liquidity requirements for co-investments and the dividend capacity will play a significant part in the decision on the distribution rate.
Support promising mid-market business models
We aim to support promising mid-market business models and therefore give our portfolio companies the leeway they need to successfully pursue their strategic development. Our portfolio companies should remain well poised beyond DBAG’s investment period. We believe that the value of our investments will be particularly high, if the prospects for their further progress are favourable after we exit them.
Maintain and build on our reputation in the private equity market
By successfully supporting our portfolio companies, we want to strengthen the standing we have built in the private equity market over nearly five decades and underpin our good reputation. We are particularly successful as an investment partner to mid-market family-owned businesses. We structure significantly more buyouts of companies that were previously family-held than other financial investors. Appropriately considering the interests of all stakeholders in conjunction with an investment also serves to fortify our reputation.
Acknowledgement as an advisor to private equity funds
The assets of DBAG funds constitute a substantial part of DBAG’s investment base. The funds are organised as closed-end funds, and regularly raising the capital for successor funds is a requirement. Investors’ acknowledgement of our performance is therefore important. This, for example, is mirrored in the large share of investors that subscribe to further funds. Investors’ acknowledgement not only depends on whether we have achieved commensurate returns. A decisive factor is also whether we are perceived to be reliable and trustworthy. We therefore attach great importance to open, responsible interaction with the partners in DBAG funds.
STRATEGY: INVESTMENTS IN GERMAN MITTELSTAND COMPANIES WITH DEVELOPMENT POTENTIAL
Broad spectrum of investment criteria
Deutsche Beteiligungs AG invests in established companies with a proven business model. This approach excludes investments in early-stage companies or companies with a strong restructuring need. Portfolio companies should exhibit promising potential for development, for example, by improving their strategic positioning or operational processes. Such companies are, among other things, characterised by
- leadership positions in their markets,
- entrepreneurially-driven managements,
- strong innovative capacity and
- future-viable products.
Many such companies can be found in Germany’s Mittelstand, for example, in
- mechanical and plant engineering, among
- automotive suppliers and
- industrial support services providers as well as among
- industrial component manufacturers.
DBAG’s investment team has a particularly high degree of experience and expertise in these four core sectors: about 80 percent of all transactions in the past 20 years stem from these industries. That is why we are capable of structuring even complex transactions, such as spin-offs from large corporations or acquisitions out of conglomerates or acquisitions of companies with operational challenges. Beyond that, we also find companies with impressive development potential in sectors, such as telecommunication or consumer-oriented services, which have strongly gained in significance in recent years. Geographically, we concentrate on companies domiciled or whose business is centred in German-speaking regions.
We consider a broad range of criteria when taking our investment decisions. We principally examine whether the products and services of potential investee businesses also satisfy the needs arising from changing economic and societal conditions.
We concentrate on mid-market companies, that is, those with annual revenues from 50 million to 500 million euros. Their debt-free enterprise value – irrespective of the type of investment – will generally range from 50 million to 250 million euros. Investments in smaller companies may also be considered, if there is potential for significant growth.
The equity invested ranges from ten to about 100 million euros per transaction. The portion attributable to DBAG extends from five to some 20 million euros, depending on the investment ratio between the fund and DBAG. Larger transactions with equity investments of up to 200 million euros will be structured using the top-up fund of DBAG Fund VII; in these instances, DBAG’s capital investment could increase to about 34 million euros per transaction.
We endeavour to achieve a diversified portfolio. For investments in several companies operating in the same industry, we take care that they serve different niche markets or operate in different geographical regions. Most of our portfolio companies operate internationally. This applies to the markets they serve and, increasingly, to their production sites.
Many of our portfolio companies produce capital goods. The demand for these products is generally subject to stronger cyclical swings. Investments in companies whose performance is more strongly linked to consumer demand mitigate the effects of business cycles on the value of the portfolio.
Investment performance is prerequisite for growth in both business lines
In our business line of Fund Investment Services, our aim is to have a successor fund exceed the size of its predecessor. That way, total advised assets will grow on a several-year average and, with that, the basis for fee income from investment services to funds.
Capital commitments to a (successor) fund are significantly influenced by the performance of a current fund. Thus, a prerequisite for increasing advised assets is, among other things, an excellent track record. Investors also value our investment team’s experience, size and network.
In the long term, the portfolio value and, consequently, the earnings basis for value appreciation from the portfolio will only grow if DBAG invests alongside the funds and if the value growth potential inherent in the portfolio companies is subsequently realised. For that reason, the investment performance also determines the growth in the Private Equity Investments business line.
KEY PERFORMANCE MARK: RETURN ON CAPITAL EMPLOYED
It follows from the nature of our business and its accounting methodology that the Company’s value may decrease in individual years, since it is largely determined by the fair value of the portfolio companies at the end of a reporting period. That value is, however, also subject to influences beyond DBAG’s control, such as those from the stock market. The Company’s value is understood to have increased over the long term when, on an average of, for example, ten years, the return on the capital employed per share exceeds the cost of equity.
The key performance measure is the return on the Group’s capital employed. We determine it from the equity per share at the end of the financial year and the equity, less dividends, at the start of the financial year.
We derive the cost of equity once annually based on the capital asset pricing model from a risk-free base rate and a risk premium for the entrepreneurial risk. The risk premium is determined by also considering a risk premium for the stock market as well as DBAG’s individual risk.
CONTROLLING: REGULAR ASSESSMENT OF PORTFOLIO COMPANIES AND OF INVESTMENT PERFORMANCE OF DBAG FUNDS
Medium-term performance of portfolio is key measure
We do not manage our business by traditional annual indicators such as operating margins or EBIT. Instead, key influential parameters are the several-year average return on capital employed and the medium-term development of the portfolio value. The latter is influenced by the investment progress, the value growth of individual investments and their realisation. On an annual basis, we measure the development by the net result of investment activity and net income before taxes that we achieve in our Private Equity Investments business line.
At portfolio company level, traditional indicators, on the other hand, play a direct role: when taking our decision to invest, we clearly define performance targets based on the business plans developed by the portfolio companies’ managements – such as for revenues, profitability and debt. During the time of our investment, we valuate our portfolio companies at quarterly intervals using their current financial metrics. On that basis, we closely monitor their progress in a year-over-year and current budget comparison.
Assessment of fund investment services by indicators commonly used in the private equity industry
The performance of our Fund Investment Services business line chiefly derives from the development of the volume of DBAG funds and total assets under advisement. The volume of DBAG funds determines the fee income from investment services to funds. In addition to fee income, net income before taxes generated by fund investment services is significantly influenced by the cost of identifying investment opportunities, of supporting the portfolio companies and their ultimate disinvestment.
ENSURING PERFORMANCE: BOARD OF MANAGEMENT MEMBERS DIRECTLY INVOLVED IN ALL RELEVANT OPERATING PROCESSES
Members of the Board of Management are also involved in the core processes of DBAG’s business. They particularly engage in generating investment opportunities as well as in analysing and negotiating acquisitions and disinvestments.
A key instrument in ensuring performance is the risk management system. The insight gained from the risk management system is discussed on a continual basis at the meetings on the state of the portfolio companies.