Deutsche Beteiligungs AG Initiation of coverage

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1 Deutsche Beteiligungs AG Initiation of coverage Accessing s Mittelstand Deutsche Beteiligungs AG (DBAG) is a private equity firm listed in Frankfurt since Listed private equity (LPE) funds, like DBAG, provide broad access to an asset class that has performed well over the long term in a tradable form with a low minimum investment size. DBAG is differentiated from most of its peers due to its geographic and sector focus. DBAG combines the LPE model with access into the German Mittelstand, the core of s ongoing success. DBAG has a long and successful track record of performance and the current net discount to NAV of 26% (ex cash and listed securities) could prove unjustified if the underlying companies are more resilient than is being priced in or if markets recover faster than expected. 12 months ending Total share return (%) Total NAV return (%) LPX Europe TR (%) DAX 30 Index TR (%) 31/07/09 (4.9) (9.2) (40.3) (10.7) 31/07/ /07/ /07/12 (16.2) (8.7) (16.7) (15.2) Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items. Strong long-term value creation DBAG has built up a wealth of experience since 1965 and has become the largest listed private equity player in, being involved in more than 300 private equity deals since inception, and with current assets under management (including coinvestment funds) of around 1.2bn. With a market cap of c 230m and average annual turnover of c 34%, DBAG is one of the more liquid European based LPE funds. Performance has compared favourably with both equities and its peers, with a total return on NAV of 208% over 10 years (DAX Index: 94%) to 3 August 2012 Unique access to the Mittelstand DBAG has focused in recent years on mid-market German management buyouts (MBO) in its core Mittelstand market, a broad range of small-to medium-sized privately owned companies which have widely been credited with being a core strength of the German economy. Its primary focus is on the mechanical and industrial engineering, automotive suppliers, chemicals and industrial services. With credit markets remaining tight, DBAG expects more opportunities for expansion financing going forward. Large underlying discount DBAG has generally traded at a premium to other listed PE funds. We ascribe this to its robust balance sheet, strong long-term track record, regular dividend and its focused investment mandate. DBAG s 10-year NAV growth of 208% is strong, although its share price performance has been less robust (c 86%). Amid the eurozone turmoil its discount to NAV has increased to c 12%, or c 26%, excluding net cash of 113m and its listed investment in Homag, which appears anomalous for a company with such strong historical NAV growth. Private Equity 8 August 2012 Price 16.5 Market cap 226.1m NAV 255.5m NAV per share 18.68* Discount to NAV 12%* * Last published NAV as at 30 Apr Shares in issue 13.7m Free float 75% Code DBA Primary exchange Deutsche Borse Other exchanges Xetra Share price performance Jun/11 Jul/11 Aug/11 Sep/11 Oct/11 Nov/11 Dec/11 Jan/12 Feb/12 Mar/12 Apr/12 May/12 DBA GR Equity Discount Three-year cumulative performance Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Sep/10 Dec/10 Mar/11 Jun/11 Sep/11 Dec/11 Mar/12 Jun/12 LPX Europe DBA GR Equity DBA NAV 52-week high/low Next event Quarterly results 14 September 2012 Analysts Jonathan Goslin +44(0) Martyn King +44(0) financials@edisoninvestmentresearch.co.uk Deutsche Beteiligungs AG is a research client of Edison Investment Research Limited

2 Exhibit 1: DBAG at a glance Investment objective and fund background Acquires subsidiaries of corporate groups and mid-sized enterprises in and neighbouring German-speaking countries, focusing on growth-driven profitable business valued between 50m and 250m. Recent news Forthcoming announcements/catalysts Capital structure Fund details 03/07/2012 First closing of DBAG Fund VI 28/03/2012 Wilken von Hondenberg announced he will retire at next year s AGM following over 30 years at DBAG AGM Mar 2013 Total expense ratio 3.8% Group Deutsche Beteiligungs AG Interims 14 Sep 2012 Net gearing Net cash Manager Team managed Year end October Annual mgmt fee n/a Address Boersenstrasse 1, Frankfurt Dividend Mar 2013 Performance fee n/a am Main, Launch date Dec 1985 Company life Unlimited Phone Wind-up n/a Loan facilities Website Funds under management (IFRS) (as at 31 Oct 2011) Sector breakdown (DBAG as at 30 Apr 2012) Shareholder base (DBAG as at 31 Oct 2011) Geographic split of investments (DBAG as at 30 Apr 2012) Dividend history DBAG Expansion Capital Fund ( 142m) DBAG Fund V ( 291m) Institutional investors USA 18% Institutional investors other countries 9% Rossmann Beteiligungs GmbH 20% Deutsche Beteiligungs AG Group ( 239m) DBG Fund I and DBG Fund III ( 20m) DBAG Fund IV ( 108m) Institutional investors 13% Private sh'holders 40% Automotive suppliers 18% Consumer goods 3% Industrial services and logistics 12% Rest of world 3% Other European countries 12% USA 2% Share buyback history Others 6% Mechanical and industrial engineering 61% 83% / / /06 Base DPS 2006/ / / /10 Special DPS 2010/11 EUR millions / / / / / / /11 Source: DBAG, Edison Investment Research 2

3 Accessing s Mittelstand DBAG s roots lie in Deutsche Beteiligungsgesellschaft mbh, which was founded in 1965 to provide equity to unlisted mid-sized companies in s Mittelstand. It later became Deutsche Beteiligungs AG and listed on the Frankfurt and Düsseldorf stock exchanges in Since 2001 it has focused on financing MBOs, reflecting economic conditions and relative investment opportunities, but from 2010/11 has once again been seeking growth capital investment opportunities. The Mittelstand boasts a number of truly global brands such as BMW and Siemens, but it is in fact the Mittelstand which forms the backbone of Europe s largest economy. The German word Mittelstand refers to a broad range of small-to medium-sized privately owned enterprises. Mittelstand companies employ more than 70% of German workers and generate nearly half of the country s GDP. These companies are often dominant global players in valuable niches that are largely invisible to the average consumer but, nevertheless, are critical to the manufacturing process. For example, Spheros GmbH, from its base in Gilching, has grown to be the global market leader in the development and manufacture of air-conditioning units, engine-independent heating systems, water pumps and roof hatches for buses. The global nature of these companies and their individual strengths should provide some protection against eurozone weakness. The role of private equity Much of the Mittelstand is privately owned and in many ways can be said to already contain one of the main tenants of the private equity model, the alignment of management and ownership. As these businesses grow and face succession issues, private equity can fill the gap by providing finance, new ownership and the experience to support development while maintaining this alignment of stakeholders. For example, DBAG bought Spheros in December 2011 to help drive growth, primarily within its air-conditioning and heating systems divisions. This will be driven by rising global bus production and utilise DBAG s management experience to expand Spheros s existing position and penetrate new markets. In the current environment, however, where banks are looking to reduce their balance sheets, DBAG anticipates there will be more opportunities to invest through expansion financing. DBAG s performance DBAG s performance has compared favourably with both equities and its peers, with a total return on NAV of 208% over 10 years (DAX Index: 84%). However, the recent eurozone turmoil has resulted in its discount to NAV increasing to c 12%. If net cash of c 113m and its listed investment in Homag are stripped out then this discount widens to c 26%, which appears anomalous for a company with such strong historical NAV growth. Exhibit 2: DBAG s cumulative historical performance Total return ( ) YTD 1 year 3 years 5 years Since 01/11/04* 10 years DBAG - total return (3.90) (3.07) DBAG - NAV LPX Europe (0.09) (41.46) DAX Index (7.67) FTSE All-Share Index (4.82) As at 03/08/12. *DBAG switched to IFRS from German GAAP at 01/11/04. Source: Morningstar, DataStream. 3

4 The Mittelstand: Manufacturers of the manufacturers of the world DBAG s core expertise is in German small- and medium-sized enterprises, primarily in mechanical and industrial engineering, automotive suppliers, chemicals and industrial services. Although privately owned, these German companies generally have leading technological skills and operations worldwide, due to their specialisation in niche markets and focus on high quality goods. On an international scale, German manufacturers are in the top three in 29 out of 32 internationally comparable industrial sectors, according to the VDMA. Exhibit 3 below gives an indication of the strong position of German companies in global mechanical engineering exports. This focus has enabled to benefit from growth in developing economies, supplying many of the tools and machines used to fuel this growth. Exhibit 3: German engineering leads in global export markets Export ranking 1st 2nd 3rd Power transmission engineering 26.0% Japan 11.80% Canada 8.5% Machine tools 23.1% Japan 13.70% Italy 11.2% Food processing & packaging 25.8% Italy 22.00% US 7.6% machinery Process engineering & equipment 17.8% US 14.40% Italy 8.4% Precision tools 20.3% Japan 12.30% Canada 11.7% Plastic & rubber machinery 24.3% Italy 11.30% Japan 10.8% Woodworking machinery 24.8% Canada 17.30% Italy 14.1% All mechanical engineering 19.1% US 12.20% Japan 9.4% Source: Deutsche Beteiligungs AG/National Statistical Agencies, VDMA According to DBAG, the average German Mittelstand company generates over half its revenues from exports. Investment in these companies provides exposure to global growth market opportunities. The geographic revenue breakdown of DBAG s investments is shown in Exhibit 4 below. Exhibit 4: Geographical revenue split (% of total portfolio revenue generated) Mechanical engineering and plant construction (59%) Automotive supply (12%) Speciality chemicals (5%) Industrial services and logistics (24%) 7% 33% 30% 31% 47% 52% 15% 10% 5% 70% 100% Europe North America Asia-Pacific Other Underlying companies: Underlying companies: Underlying companies: Underlying companies: Broetje Romaco Spheros Coveright FDG Homag Coperion Preh ICTS Clyde Bergemann Grohmann JCK Holding Based on 2011 revenues converted into Euros. % of total portfolio revenue is based on the combined ownership of DBAG and the coinvestment funds. Source: Company data. Recent figures show German trade with its European neighbours tumbled in April, with imports falling at their fastest rate in two years. These have fuelled concerns that s immunity to the crisis is weakening and that it will be less able to help drive growth in trade within the eurozone. Furthermore, if the euro was to collapse and reverted back to the Deutschemark, then the expected subsequent strengthening in its exchange rate would drastically affect the competitiveness of German 4

5 exporters and ultimately hinder profitability. Despite this, s sales to non-european markets gained 10.3% year-on-year in April, which helped offset the 3.6% fall in European exports. This prompted the Bundesbank to raise its 2012 growth outlook for to 1.0% this year (2011 GDP +3%), up from an earlier forecast of 0.6%. It is the Mittelstand s niche market specialisation, development of product related services, investing in vocational training to support its skilled workforce and strong government support that will provide the framework for to maintain its position as one of the world s leading exporters. In addition, those companies with leadership positions in their respective markets are generally more resilient than weaker competitors and often emerge stronger from a crisis. Exhibit 5 illustrates how this has helped manufacturing to remain one of the main contributors to German GDP. Exhibit 5: Manufacturing as a percentage of total GDP 25% 20% 15% 10% 5% 0% France Italy UK Source: DBAG In its most recent H112 results, DBAG reported that despite negative news in individual instances, revenues and earnings for 2012 in its underlying companies are expected to exceed those of the preceding year. The extensive realignment programmes initiated during the preceding economic crisis should also help them weather the current slowdown. DBAG has been actively looking to invest in those companies with manufacturing capabilities in the markets they export to. Its investment in Clyde Bergmann Group, a developer and manufacturer of components for fossil-fuelled power plants, is a clear example of this. The company has gained strong market positions through the cutting-edge technology built into its products. But it is the company s global presence that is one of its major strengths. Its operational network extends to Europe, Asia, Australia, North and South America and Africa and it operates production, sales and services sites in all major market regions. Accessing the Mittelstand through LPE DBAG is very much a market leader and participated in three of the 30 German private equity transactions in 2011 despite its specialised sector focus. It invests in the predominantly privately held Mittelstand in two main ways: management buy-outs, where a controlling stake is up for sale; and expansion financing to support continuing development. The private equity model seeks to add additional value by supporting management in improving strategic positioning, operating efficiency, and financial efficiency. This is made easier by the alignment of management and investor interests. DBAG has built up much experience and knowledge that can be usefully applied to these businesses. DBAG estimates that there are c 4,500 German companies in its target market with sales between 100m and 500m, of which less than 3% have been targeted by buyout sponsors leaving plenty of room for future growth. However, market activity has been weak since the peak in 2006, with German MBO activity falling c 80% to the low point in Activity has started to recover but lending terms 5

6 are now tighter than before the crash, making transactions more difficult to complete but it also reduces the competition for deals. Since 2007 DBAG has seen the number of competitors vying for new deals fall by over a third and now only has to compete with circa three competitors per deal. Given the pressure that banks face to de-lever their balance sheets, the lending markets are likely to remain tight and DBAG anticipates greater demand for non-bank expansion financing. It has ample resources (as at 30 April 2012, DBAG had 22.5m in cash and 90.4m in liquid securities, boosted by the realisation of two very profitable investments in 2011) and also raised 142m in a new expansion capital fund in August Exhibit 6: MBOs in s mid-market segment (transaction value m) 6, , ,000 3,000 2,000 1, Source: Company data Number Value In its study How do private equity investors create value? A study of 2008 European exits, Ernst & Young calculated that the source of return on European industry exits could be split very roughly between additional leverage, PE driven strategic and operational improvement, and the valuation uplift from listed equity prices. Given tighter lending conditions and the uncertain direction of listed valuations, we believe that careful selection of investments, enhanced by operational improvement will need to play a larger role in future value creation. Conscious of the cyclical nature of its industrial investments, DBAG makes relatively less use of leverage and its own internal estimates show that between 1996 and 2011, 62% of its realised gains resulted from earnings growth in investee companies, 31% from an improvement in valuation multiples, and just 7% from leverage. Investment process and portfolio construction Exhibit 7: DBAG s structure of investment Management of target company (in case of an MBO) DBAG Team Parallel fund DBAG and its parallel investing funds, fixed ratio Target company Source: Company data Investments are made in sectors in which DBAG s team members have developed an in-depth understanding. Since 1995, nearly two-thirds of all of their transactions have been completed in their core sectors of mechanical engineering and plant construction, automotive suppliers and industrial services. Typically, companies will be valued between 50m and 250m, be headquartered in 6

7 , Austria or Switzerland, and have overseas operations, an excellent market position, a unique proposition and proven business models. DBAG also prefers those companies with low levels of debt. The average net debt to EBITDA ratio for the portfolio is less than 3.0x. In-depth analysis is conducted before assets are committed to investments by DBAG s investment team. DBAG also manages funds on behalf of other German and international organisations, such as pension funds, fund-of-funds, banks, foundations etc. These co-investment funds combine the financial resources of these organisations and invest alongside DBAG on the same terms, in the same investee businesses and in the same instruments, although they still have independent decision-taking structures and can operate on their own account. By investing alongside co-investment funds, DBAG is able to lower its operating costs, thanks to the fees it charges them for accessing and managing these investments, and to further diversify its portfolio as the larger capital base enables DBAG to invest in a broader range of companies in its chosen mid-market space. DBAG has maintained its ability to raise assets through its co-investment funds over recent years. In June 2011 it successfully raised 142m for its Expansion Capital Fund and in early July 2012 it raised a further 451m for its DBAG Fund VI. The latter is expected to be heavily oversubscribed and has a target of 650m. Approximately 80% of these funds were raised from institutional investors outside of and, in addition to strong support from their existing investors, have received numerous commitments from new investors. Portfolio construction DBAG invests in companies through majority stakes (MBOs) (for example companies seeking a solution for succession issues) and minority stakes for companies seeking expansion capital. In an MBO, DBAG and other financial investors acquire a majority of the company, co-investing with management. Expansion capital investment generally refers to minority equity capital investment. This will often allow for the receipt of profit distributions and dividend payments, which means that the investment return profile is lower risk. Holding periods are also generally longer than for an MBO. Combining own capital and capital available through co-investment funds, DBAG is able to make investments in companies ranging between m in value. In response to market conditions, DBAG invested exclusively in MBOs from 2001 to 2010, although since then lending conditions have tightened and DBAG anticipates an increase in expansion capital opportunities. There remains a small historical investment in international buyout funds (indirect MBOs), which will be gradually liquidated following the final realisations from the funds portfolios. Exhibit 8: Number of investments as at 30 Apr 2012 Exhibit 9: Value ( m) as at 30 Apr 2012 Expansion financing 3 Indirect MBOs 3 Direct MBOs 12 Expansion financing 7.4m Indirect MBOs 7.0m Direct MBOs 114.3m Source: Company data Source: Company data 7

8 Management The management board consists of four members, Torsten Grede, Wilken Freiherr von Hodenberg, André Mangin and Dr Rolf Scheffels. As a German company, DBAG operates with a two-tier board structure and the management board is responsible to the supervisory board made up entirely of six non-executive members, representing shareholders. Their investment team is made up of 18 investment managers and a research specialist, in addition to the four management board members. Two-thirds of the team have been with DBAG for more than 10 years. A team of two to four individuals is generally responsible for completing a transaction and subsequently for monitoring it. Each investment team is always supported by a member of the board of management. The spokesperson of the board, Wilken von Hodenberg, has announced he will be stepping down from this position at next year s 2013 Annual Meeting following over a decade at DBAG. Wilken von Hodenberg will be succeeded by Torsten Grede as the management board s new spokesperson, although it is hoped he will maintain links with DBAG as a non-executive director. Mr Grede has been a member of the board of management since January There has been no subsequent announcement of any additional board hires which leads us to believe the board may consist of three rather than four members going forward, thus generating further costs savings. Senior key management always invest directly in the co-investment funds equal to a combined value of 1%. If the funds and DBAG generate a realised internal rate of return of 8% then management will earn an additional 20% on all further gains, thereby aligning their interests with those of investors. Investment portfolio The following page outlines DBAG s current investments and highlights the international exposure gained from investing in these niche companies. Portfolio valuation multiples are calculated internally and are reviewed quarterly to reflect price changes in the underlying company s quoted peer group. Measured by their fair value, the nine largest investments account for 90% of the total portfolio value (IFRS). Most of the companies made good progress in 2011 and, in addition to reducing debt, achieved positive like-for-like revenue and earnings growth. DBAG realised one complete exit, Heim & Haus Holding GmbH, one partial exit in Preh GmbH and a new management buyout of Romaco Group in This has been further complimented by an additional two management buyouts of Spheros GmbH and Broetje-Automation GmbH in March DBAG s largest investment is in Homag Group AG, a global leader in the development and production of woodworking machines and plants. First purchased in January 1997 and subsequently listed in February 2007, Homag constitutes 25% of DBAG s portfolio value and has had a clear impact on its overall valuations. Homag s early cyclical business was exposed to the first effects of the slowdown in global economic growth and experienced a fall in orders in H211. This led to a sharp fall in both its NAV and its share price in Since then, Homag has recovered some of these loses and has rallied c 60% in 2012, which has helped boost DBAG s H112 NAV. 8

9 9 Exhibit 10: Current investment portfolio as at 31 March 2012 Company Country 2011 Revenue m Clyde Bergemann Group Coperion GmbH Coveright Surfaces Holding GmbH Wesel, ; Glasgow, UK; Delaware, USA Stuttgart, Mühlheim an der Ruhr, Number of staff First invested Investment (historical cost) Equity share DBAG (%) Equity share coinvestment funds (%) Sector Markets US$423m 1,550 May % 45.1% A developer and manufacturer of components for fossil-fuelled power plants. Worldwide 456m 1,880 Jul % 78.0% A developer and manufacturer of Worldwide compounding systems and bulkmaterials handling equipment. 155m 380 Jun % 42.5% A producer of surfacing materials. South America FDG Group Orly, France 110m 750 Jun % 64.1% A non-food category manager for supermarkets in select product lines. Grohmann GmbH Prüm, 103m 650 Dec % 0.0% A developer and provider of plants for industrial automation. Homag Group AG Preh GmbH Romaco Group ICTS Europe Holdings B.V. JCK Holding GmbH Textil KG Broetje-Automation GmbH Schopfloch, Bad Neustadt an der Saale, Karlsruhe, Amsterdam, Netherlands Quakenbrück, Wiefelstede, 799m 5150 Jan-97, Feb % 16.3% A provider of woodworking machines and plants for the furniture and construction supplies industries. France and neighbouring countries Worldwide Worldwide 412m 2700 Nov % 10.8% A developer and manufacturer of sophisticated driver operating and control elements for cars. Europe, USA, Asia 93m 400 Apr % 77.3% A developer and manufacturer of Worldwide machines and complete lines for packaging and processing applications. 338m Apr % 72.6% A provider of security services for aviation Europe and other areas. 584m 780 Jan % 12.4% A marketer of textiles. 112m 350 Mar % 81.2% A developer and manufacturer of machines and complete lines for the automated production and assembly of aircraft and a support service provider. Spheros GmbH Gilching, 185m 680 Mar % 81.0% A developer and manufacturer of air conditioning units and heating systems, water pumps and roof hatches for buses. Source: Company data Worldwide Europe, Latin America and Asia Deutsche Beteiligungs AG 8 August 2012

10 Total expense ratio to fall The hands on ownership and extensive due diligence that generally underlies successful PE investments carries higher management fees than simpler forms of investment. A 2% per annum management fee and a performance fee of 20% (carried interest) of the excess over an agreed hurdle rate of return is a typical rate paid, even by investors who have the resources to invest directly in limited partnership with their high commitment requirement and lack of liquidity. DBAG receives c 2% on third party funds managed, covering just more than half DBAG s operating costs. An investor in DBAG indirectly pays 20% carried interest to senior management in a similar way to an investor in a limited partnership (seen as a reduction in NAV growth). But unlike a fund investor, they do not pay a management fee. Instead, the cost is DBAG s operating expenses net of manager fees earned. In the reported accounts there is some historical interest taken through expenses rather than NAV, but in the table below we adjust for this to provide a comparable figure to industry standards. Despite having cut costs aggressively during 2007/08 and increased management fee income, total net operating costs have grown c 30% since 2008, while average net assets have fallen 23% during the same period. Consultancy fees have risen as the due diligence process is now taking longer to complete, following a rise in risk aversion. More work has also been completed on expansion financing deals to accommodate the recent launch of the Expansion Capital Fund. We forecast a total expense ratio of 3.8% for FY12 (adjusted for one off items and before carried interest). This is above the c 2% level of 2008 but is below the annualised reported rate of 5.6% in H1. Much of this slow down reflects what we believe to be conservative accounting for bonuses and new fund issue costs in H1. In Exhibit 11 we give a breakdown of DBAG s net operating expenses and a comparison with 3i Group which has been cutting costs aggressively over recent years. Exhibit 11: Total expense ratio analysis (excluding carried interest) 3i Group ( m) DBAG ( m) Mar-10 Mar-11 Mar-12 Oct-10 Oct-11 Oct-12 Staff costs Adj. For pre-2006 carried int Adj. total staff costs Other operating expenses Adj. for placement fee* -0.3 Adj. other operating expenses Total operating income Adj. for VAT timing Net adj. operating expenses Op. exp. as % total avg. FUM -2.2% -1.6% -1.6% -3.6% -4.4% -2.9% Total expense ratio on avg. net -6.6% -3.9% -3.4% -3.4% -4.9% -3.8% Average number employees Staff costs per head 258, , , , , ,149 Note: 2010/11 Op. Exp. As % total avg. FUM includes the pre-2006 carried interest adjustment. *Placement fee adjustment of 0.3m reflects our assumed amortisation of accrued placement fees over five years. Source: DBAG, 3i Group, Edison Investment Research 10

11 The recent launch of DBAG Fund VI will provide additional fee income and will help to offset DBAG s relatively fixed cost base. Funds under management are expected to increase by 567m, adding c 4-5m fees in These fees will be earned once DBAG Fund VI starts to invest, which will be once Fund V completes its investment phase, perhaps six months away. Although its cost base may increase marginally to reflect the rise in due diligence activity required to invest these funds, we expect this higher revenue will significantly lower its total expense ratio down to c 2% on an annualised basis. Dividends DBAG targets a sustainable level of base dividend, while using additional surplus dividends to distribute exceptional realisation proceeds. For 2010/11 the base DPS was 0.4 (2010: 0.4) and the surplus DPS was 0.4 (2010: 1.0). The total dividend distribution was 10.9m (2010: 19.1m) from year end distributable reserves under the HGB code (the basis for dividends, not IFRS reserves) of 24.8m. We estimate that the base dividend would be sustainable for 2011/12 even with no realisation proceeds, but that some level of realisations is necessary to cover the cost base of the company and generate ongoing distributable surplus. However, the 2011/12 dividend will be buoyed by the decision of the fiscal authority for the state of Hesse to no longer deem income from the management of a coinvestment fund to be subject to value-added-tax. In the interim accounts at 30 April 2012, provisions of approximately 11m were reversed. If DBAG is successful in increasing its expansion capital investment this should support dividend income to the company and hence its distributable profits. Sensitivities European crisis While the majority of DBAG s investment companies are export focused, with a large proportion directed outside the eurozone, the current European crisis creates exceptionally high uncertainty, which could significantly impair returns, particularly if the eurozone s troubles spread to other major economies. Volatile performance Due to the long-term nature of private equity investments and the variability of external influential factors, such as valuation ratios in the stock markets, DBAG s NAV will endure periods of notable volatility; this holds particularly true for comparisons of individual quarters. Price discount Despite the strong subsequent rally in equity markets, listed private equity funds have continued to trade below their NAVs. Investors fear past LPE returns were overly reliant on large amounts of low-cost debt, which are unlikely to return in the near future, and that the high fees and low liquidity will restrict any other performance. Liquidity DBAG s liquidity is in line with its peers having had c 34% of its market value traded over the last 12 months. If this was to fall substantially then it would have a notable impact on investors ability to realise their investment in a timely fashion. Valuation DBAG is relatively unique amongst its single manager listed private equity peers due to its highly concentrated regional and sector focus on the German Mittelstand. After recovering from the financial crisis, the shares have mainly traded at or around the NAV. In recent months the discount has widened, coincident with the escalating eurozone crisis. 11

12 Exhibit 12: Peer comparison table As at 31 July 2012 ( ) Price total return rebased to 100 NAV total return rebased to 100 Disc(Fair) 1 year 2 years 3 years 1 year 2 years 3 years DBAG EUR (12.1) 3i GLO (24.0) Altamir Amboise EUR (49.4) Dunedin Enterprise UK (37.0) Electra Private Equity UK (28.3) GIMV NV GLO (15.1) HgCapital Trust UK (12.7) Promethean UK (43.7) Source: Morningstar As one of only a few listed private equity funds focused on the Mittelstand, it is difficult to create a relevant peer group. Consequently, we have used the LPX Direct Index, which covers all liquid private equity companies that pursue a direct investment strategy, as a peer group proxy. Exhibit 13: Price discount since % 50% 0% -50% -100% -150% 01/01/ /01/ /01/ /01/ /01/ /01/2012 Premium (discount) excl. Net cash Premium (discount) LPE Europe NAV price discount Source: Deutsche Beteiligungs AG, Thomson DataStream, Edison Investment Research The recent market turmoil has resulted in DBAG trading at a c 12% discount which widens to a discount of c 26% relative to its NAV once you exclude its net cash of 113m and its listed investment in Homag. This discount could prove unjustified if the underlying companies are more resilient than is being priced in, or if DBAG is able to lower its TER, most likely by growing its asset base. EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. It has won industry recognition, with awards both in Europe and internationally. The team of 90 includes over 55 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 350 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. Edison s research is read by institutional investors, alternative funds and wealth managers in more than 100 countries. Edison, founded in 2003, has offices in London, New York and Sydney and is authorised and regulated by the Financial Services Authority ( DISCLAIMER Copyright 2012 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Beteiligungs AG and prepared and issued by Edison Investment Research Limited for publication in the United Kingdom. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison Investment Research Limited at the time of publication. The research in this document is intended for professional advisers in the United Kingdom for use in their roles as advisers. It is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. A marketing communication under FSA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison Investment Research Limited has a restrictive policy relating to personal dealing. Edison Investment Research Limited is authorised and regulated by the Financial Services Authority for the conduct of investment business. The company does not hold any positions in the securities mentioned in this report. However, its directors, officers, employees and contractors may have a position in any or related securities mentioned in this report. Edison Investment Research Limited or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. This communication is intended for professional clients as defined in the FSA s Conduct of Business rules (COBs 3.5). Registered in England, number Edison Investment Research is authorised and regulated by the Financial Services Authority. London +44 (0) Lincoln House, High Holborn London, WC1V 7JH, UK New York Lexington Avenue, Suite 1724 NY 10168, New York, US Sydney +61 (0) Level 33, Australia Square, 264 George St, Sydney NSW 2000, Australia