Letter of the board of management
Members of the Board of Management
From left to right:
Dr Rolf Scheffels, Torsten Grede (Spokesman), Susanne Zeidler
Frankfurt am Main, 9 December 2015
Our business model is distinguished by many unique features. One of the most significant is that no two years are alike. Whereas the focus in 2013/2014 was on highly profitable realisations, the reporting year was characterised by new investments. We expanded our portfolio by adding seven new investee businesses, all of them members of Germany’s “Mittelstand”. New investment reached its highest level in more than ten years, providing an excellent foundation for future value growth. Between investing and disinvesting, developing our portfolio companies is a mainstay of our business. Net income of 27.0 million euros and a gain in net asset value per share of 10.0 percent this past financial year are once more proof that we were successful in that.
If you compare the financial data in this Annual Report with that of the preceding year, in some instances you will find figures that are different from those published previously. We had to adapt our accounting to a new reporting standard, which made it necessary to partially restate the comparative year’s amounts.
Two other reasons make it difficult to compare this year with 2013/2014: DBAG’s financial year now ends on 30 September. This aligns our reporting dates more closely to the stock market standard. 2014/2015 was therefore a truncated financial year of only eleven months. A more significant factor is, however, the change in the scheme that entitles investment team members to participate in the investment performance, which was adopted almost ten years ago. The new scheme has now taken effect in the financial statements for the first time.
Why is this so? Every investment decision taken by Deutsche Beteiligungs AG requires a private co-investment by those involved in that decision. This, too, is a particularity of our business model and is commonplace in the private equity industry. It serves to align the interests of the investors – in this case, your interests as shareholders – with those of the i nvest ment team. By investing their own money, members of the investment team partici pate in the success (or failure) of the investments. If certain conditions are met, they are entitled to a disproportionate share of the proceeds when an investment is realised. This carried interest is determined based on the total performance of DBAG’s co-investments alongside the relevant DBAG funds.
DBAG has entered into eleven investments alongside DBAG Fund V. Four of these have been realised in recent years – very profitably in a number of cases. The other seven are making very good progress. Invested in the period from June 2010 to May 2013, they have demonstrated very satisfactory value growth and are now a core part of the portfolio. Their value rose by 50 percent in 2014/2015 alone. DBAG’s share of future proceeds from these investments must therefore be reduced by the carried interest to which the investment team members are entitled. The carried interest reflects the aggregate performance of DBAG Fund V since the start of its investment activity and includes the gains on the four investments sold to date. Its payment will extend over a number of years, correspondent with the realisation of the individual investments’ value appreciation.
The carried interest entitlement is accounted for within the net result of investment activity. This item largely derives from the net result of valuation, which reflects the portfolio companies’ value appreciation. The improved sentiment in the stock markets over the past year delivered a positive contribution. Once again, however, the key reason for this year’s very favourable valuation movement was the companies’ improved earnings power. The companies increased their earnings by an average of 8.5 percent. Reflected in that figure are only those investee businesses that were in the portfolio at the beginning of the financial year.
The earnings growth is also the result of change processes within our portfolio companies – processes that range from optimising production procedures and expanding sales organisations to revising product portfolios. We encourage our portfolio companies to invest in their businesses. This includes add-on acquisitions, which make it possible to quickly close gaps in their sales landscape or add complementary products to the portfolio. In the past financial year, six portfolio companies strengthened their position through add-on acquisitions of smaller companies, the same number as in the preceding year. We support these developments – with further capital, if needed.
Of the new investment that took place this financial year, some nine million euros were attributable to capital increases used to finance such add-on acquisitions. The greatest share of that investment, however, can be ascribed to the new portfolio companies that we are presenting to you in this Annual Report. After the five management buyouts and the investments in family-run businesses, both funds alongside which we invest have been invested to about half.
We provide equity for numerous financing situations in the mid-market. This differentiates us from many competitors. Through co-investments alongside the funds, we structure the acquisition of companies or invest in minority stakes in growing businesses. DBAG’s excellent market position shows that this has met with broad approval. We have improved our offering yet again. The fund for expansion financings now enables us to enter into investments which allow for holding periods that are longer than what was previously possible. This flexibility enhances the attractiveness of our offering, but, because it is tied to a new fee scheme, will for the time being come at the expense of net income from fund investment services.
Irrespective of the slight decline this past truncated financial year, income from fund investment services is stable and readily predictable. Its growth in recent years proves how greatly our services are appreciated by other investors. That growth is reason enough for us to in crease the base dividend by ten eurocents. Surplus dividends are contingent upon the port f olio generating sizeable returns. Although there were no major exits in financial year 2014/2015, there is, however, a retained profit from the profitable realisations in recent years of 67.1 million euros.
For the 2014/2015 financial year, in which DBAG looked back on 50 years of DBAG and 30 years as a listed company, the Supervisory Board and the Board of Management propose using the profit earned in the past for a distribution which, in effect, would double the base dividend. In total, a dividend of 1.00 euro per share is slated for distribution, subject to shareholders’ approval at the Annual Meeting.
In 2015, we commemorated the Company’s foundation in September 1965 and the stock market launch of DBAG shares in December 1985. Two success stories.
We are also confident about the future, for three reasons in particular. First, our product is needed. Private equity plays a key role in development processes at companies – in generational transitions, in realignments at large corporations and in financing growth. In that environment, DBAG is perceived as a preferred partner by Germany’s “Mittelstand”.
Second, we have demonstrated how strong our business model is and how much value it can create. Private equity frequently achieves a superior return compared to other equity investments. Few people carry out more extensive analyses before they commit their capital than do the investment managers of a private equity company. Clearly, in-depth analysis at the outset lays the foundation for a successful investment. Corporate governance can take effect detached from the quarterly rhythm of the stock market. This, too, augments performance.
And third, we are confident that we will be able to continue building value in the future and earn more in our business than the cost of our equity. In 2014/2015 yet again, we further developed our work processes and invested in our investment team and market presence. This will enable us to complement our portfolio with promising companies on an ongoing basis.
In the near term – that is, in the current 2015/2016 financial year – the existing portfolio will determine our performance. Following the high level of new investment over the past twelve months, our portfolio has increased significantly. The platform for creating value is now broader than it was a year ago. The maturity of the investments has also grown. Overall, our portfolio is in prime condition. We are well aware of the quality of the companies in which we have invested. We have therefore forecast net income to significantly exceed that of the past financial year. As always, our forecast implies a stable environment. That also holds true for the stock market, whose valuation ratios have an influence on our income. It also applies to the economy in general, since even a large well-balanced portfolio is not immune to cyclical effects.
|Torsten Grede||Dr Rolf Scheffels||Susanne Zeidler|