DBAG to target EUR 1.3bn-EUR 1.5bn for new buyout fund next year

DBAG's ninth fund will be slightly larger than its predecessor, DBAG Fund VIII, which was closed on EUR 1.1bn in May 2020 after being announced a year earlier, he said. Fund VIII is around 50% invested, with full deployment expected in the coming one or two years, he added.

The increase in fund size is in line with the typical 15%-30% incremental expansion in fundraising between DBAG vintages, he said. The extra capital will not diverge from its mid-cap focus, but will help address companies' valuation inflation. DBAG typically deploys EUR 40m-EUR 100m in equity for companies with EVs between EUR 75m-EUR 250m for its buyout funds, he added.

The DACH private equity investor considered doubling the size for its new fund but decided against it due to a more limited number of opportunities in the large cap space, Alzin said. According to him, foreign peers who have gone down that route are now turning to the DACH market to broaden a more limited dealflow found in their domestic markets.

DBAG could be fundraising in an environment where volatility is widening across the public market and the private market, which could affect the appetite for LPs to invest in the asset class, he acknowledges. In a trading update earlier this month, the firm said that the asset value of its private equity investments has declined by 5% in the first half of the financial year to EUR 641.8m.

And with fundraising hitting record highs in the recent past, thanks in part to GPs coming back to market more quickly for each new vintage, many LPs with new commitments are concerned about over allocation, he said.

"What I am hearing from many peer GPs is that some LPs are afraid to get over-committed to PE investments as they need to pare back losses that they made from the stock market and bonds," he said. "Equally, some LPs need to rebalance their outsized PE exposure relative to their other investments as private equity returns have done well over the past years."

Despite these concerns, Alzin said private equity remains a structurally growing market, with increasing numbers of institutional investors - asset managers, life insurers, pension funds and the likes, alongside a large influx from private and family offices, paying closer attention to the asset class.

Italian dealmaking
One area where DBAG's strategy is expected to differ from some of its earlier funds is the potential emergence of Italian deals following the opening of its Milan office last September. The GP's Italian subsidiary is on the lookout for assets across industrial tech, health care, telecommunications and IT services, among others, partner Giovanni Revoltella said in an interview with Unquote last year.

"It's a market where we feel we can do two to three transactions for each MBO fund," Alzin said. "We are looking at transactions where there is a natural link for us, especially for those looking to expand in DACH. We know our German or Swiss competitors very well, which could be valuable to companies whether for bolt-ons or understanding the market in general."

DBAG struck its latest Italian deal in MTW, a fashion-finishes manufacturer, which was previously owned by Bravo Invest, as reported.

Italy will be a "natural home" for DBAG where many of their companies has a strong industrial heritage, with aging entrepreneurs needing to consider succession issues, he said.

"Fragmented" environment
Despite increasing economic uncertainties bubbling on the back of the COVID-19 pandemic and Ukrainian crisis, there continues to be a "frenzy" in the M&A market, Alzin said.

"If you look at the stock market, we have seen corrections of sorts, but it feels like that hasn't impacted the M&A market yet, especially in the tech space," he said. "Either the private equity industry is wrong, or the stock market is wrong. Normally, the stock market tends to be more right."

The volatility, however, brings with it opportunities in what DBAG is seeing as an increasingly "fragmented" market, he said.

On the one extreme, DBAG is seeing increasingly stressed businesses emerging from the environment, but have yet to reach a distressed stage.

"There is basically no market for those assets, or bids are coming in at rock bottom prices," he said. "For these stressed businesses, we're looking at them on a very, very selective basis."

But on the other hand, it is looking at businesses which have stood the test of time through various crises and that have developed strongly and are benefiting from certain tailwinds, he said, noting that these assets are hotly contested at the moment.

DBAG believes it can get ahead of its peers investing in such hot sectors in part thanks to its presence in the stock exchange, which brings recognition from entrepreneurs who actively approach the sponsor for M&A opportunities, he said.

"Opportunities now emerging are young businesses with entrepreneurs in their 40s or 50s, often in IT services, who are receptive to selling their companies or to finding an equity partner for their businesses," he said. "For them, if there's a nice price, or a feel that they're not the best owners anymore to bring the company further, whether internationalization or because the business is becoming increasingly complicated, they will be receptive to PE investments."

Other opportunity drivers include public to private transactions, especially from sponsor-backed businesses which have recently listed in the stock exchange but have been unable to fully exit with their share prices in red territory, he said. DBAG has not operated in this area before and would not exclude it, especially if it can talk directly to large shareholders, he added.

Seller's market
Exits are "definitely on our plate" for the second half of the year, with two to three deals that were previously put on hold earlier in the year expected to come out in 2H onwards, Alzin said.

DBAG typically makes two to three exits per year, he said, noting that it is aiming to grow its AUM structurally, which would involve a mixture of more investments or larger equity tickets, he said.

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