Deutsche Beteiligungs AG

XETRA:DBAN

Earnings Call Transcript 2020-Q3

[Thomas Franke]

Good morning, everybody. We have sent out the quarterly statement as well as the presentation this morning. You should have received this information already. We welcome you.And I now hand over to Susanne Zeidler, our CFO.

[Susanne Zeidler, CFO & Member of the Management Board]

Good morning, everybody, also for my side. It's my pleasure to present the quarterly statement as at 30 June, 2020, to you. I would like to start my presentation on an upbeat note. We initiated the investment phase of DBAG Fund VIII on the 1st of August. The M&A market has been revised at least for transactions involving companies whose business model is not fundamentally affected by the pandemic. Our investment team is now working on several promising investments, and we want to secure our financial capacity to act in this situation. Fund VIII will lead to rising management fee income, thereby increasing the basis for net income from Fund Investment Services. I will come back to this in more detail later. Considerable confidence was visible on the capital markets, at least until last week, with a positive knock-on effect on multiples. The net asset value of the Private Equity Investments segment has thus risen significantly in the third quarter of the financial year, although it has yet to make up the ground lost as a result of the COVID-19 setback a quarter before. Net income from Fund Investment Services showed a more pronounced increase than planned, rising to EUR 6.6 million for the first 9 months of the financial year. We have adjusted our forecast for the remaining weeks of the financial year to bring it into line with the most recent changes.As is the case for the economy as a whole, all of our successes at DBAG are overshadowed by the effects of the pandemic. On this slide, as usual, we summarize the most important financial indicators of DBAG Group and of both segments. I will explain these in more detail as we go along. Before the M&A market largely came to a standstill in March, some of our portfolio companies were able to agree upon and conclude several acquisitions. In some cases, this has enabled them to take significant growth steps. The companies have continued to pursue their buy-and-build strategies through acquisitions, even during the pandemic.Overall, 6 portfolio companies agreed upon and closed 13 acquisitions during the first 3 quarters. During the third quarter, BTV and DING Group, 2 companies active in building fiber optic networks and the related equipment, added 1 acquisition each to the list. Most of the acquisitions were financed by the portfolio companies using their own resources. The acquisition of Klinik Helle Mitte hospital in Berlin by blikk at the beginning of the financial year was the only transaction that DBAG supported financially, providing equity of EUR 3.6 million. We've been observing a marked increase in deal flow since mid-June, as reflected in the number of investment opportunities our investment team has been able to explore. Things also got moving on the selling side. At the end of July, we were able to sign the agreement concerning the disposal of Rheinhold & Mahla, the industrial service provider for the outfitting of ship interiors in the DBAG ECF portfolio. The purchase price agreed is below the original cost and reflects what is likely to be a difficult situation for the industry in which the company operates.This was mirrored in the valuation as at the most recent reporting date. The further value contribution running into the low single-digit million is expected after the transaction is completed. We've been working from home throughout the third quarter. Thanks to the measures taken to digitalize our processes in recent years and the strong commitment of our staff, our business processes continue to run smoothly. Part of our workforce returned to the office in early July. Despite the most recent push provided by the capital markets, the pandemic has left clear marks on DBAG's portfolio. At present, the portfolio value amounts to only 1.04x the original cost after 0.89 a quarter before.Overall, the situation remains challenging, but manageable. Both of our moves in recent yields to diversify our portfolio and to increase its size are now paying off, leading to a mixed picture concerning the degree to which portfolio companies are affected. Industrial companies currently tend to be facing stronger and, in some cases, significant burn. Not surprisingly, demand for consumer-related products and services has fallen as well. Yet, a number of companies, including those from the broadband telecommunications sector and from the IT services software focused sector has hardly been affected or even not at all.In particular, despite the ongoing pandemic as at the reporting date, 90% of our portfolio companies in terms of portfolio value were either facing hardly any liquidity challenges or are in a position to overcome any challenges, thanks to their solid financial resources. Companies that are at risk of being faced with a liquidity bottleneck, either in the immediate future or in the short term, only accounted for 8% of the portfolio value on the reporting date. Relief work provided for some of these companies to further debt financings agreed upon for recent weeks.We provided additional equity to 6 companies up until the reporting date in order to support the raising of debt. During the current quarter, we provided own funds to another company. We have invested a total of EUR 4.54 million for this purpose to date. It is crucially important to understand the COVID-19 impact on our portfolio valuation in accordance with International Financial Reporting Standards and the IFRS guideline. Given that the implications of the pandemic as at 30 June had a different impact on the multiples than on the previous reporting date, we had to take a different approach in terms of our valuation methodology. As at 31st March, the implications of the COVID-19 crisis on the peer group companies were only reflected in fallen share prices. We applied these multiples to expected results of our portfolio companies that did not yet include any pandemic related effects. This approach meant that the effect of the COVID-19 crisis as at 31st March were reflected exclusively in the value contribution made by the multiple. As at 30 June, unlike the situation as at 31st March, the earnings estimates have been adjusted for all peer group companies. This meant that it was possible and in the interest of ensuring a consistent valuation approach also necessary to take account of expectations regarding long-term earnings for our portfolio companies that reflect the predicted impact of the pandemic in each case.The comparison of the 2 most recent reporting days of 30 June and 31st March shows unprecedented volatility of multiples. Around 1/3 of the valuation -- value contribution made by the multiples in the third quarter in the amount of EUR 105.1 million is based on the lower earnings estimates with around 2/3 attributable to higher share prices of the listed peer group companies. The multiples as at 30 June were higher and in some cases significantly so than those used at 30 September, 2019, and decoupled in our opinion from current price levels for enterprises.Even though net asset value rose by EUR 46.1 million in the third quarter, this was not sufficient to recoup the setback caused by the pandemic. Compared to the end of the previous financial year, the figure was down by around 9%, taking the EUR 22.6 million dividend already distributed into account. Besides this distribution to shareholders, the decline was mainly due to the impairments in the portfolio caused by the impact of COVID-19. The reversal of carried interest has the opposite effect.Slide 10 look to have the change in the portfolio value, which dominates the development of financial efforts. The additions were largely due to the closing of the 2 Cartonplast and DING Group transactions both of which have been agreed at the end of the previous financial year and related to DBAG Fund VII and DBAG ECF. This also includes additional growth capital, which we provided to DNS:NET as planned. The disposals related primarily due to the completion of the sale of inexio in the first quarter of the current financial year. Next year, it belong to the DBAG ECF portfolio. Furthermore, DBAG FUND V sold its remaining stake in Romaco Group.netzkontor nord was recapitalized, which is also reflected in disposals. Our portfolio value is usually expressed as a gross value, also including inputed carried interest. At the end of the period under revenue, this amounted to EUR 28.6 million, up EUR 5.7 million due to the valuation appreciation in the third quarter. We have not yet received the remaining funds attributable to DBAG from the sale of inexio. These account for the most part of the other items. Net gains and losses from measurement and derecognition amounted to minus EUR 40.3 million in the first 3 quarters of the current financial year. The price increases on equity markets during the third quarter following the lows seen in March resulted in a strong recovery of multiples that we apply to the valuation of our portfolio companies. Looking at the 3 quarters in total a positive contribution of EUR 60.6 million was attributable to multiples. 7 companies from the automotive and mechanical engineering sector made a negative contribution of EUR 59 million. 17 additional companies from different sectors made a negative contribution of EUR 50 million. The positive contributions come from the broadband telecommunications focus sector and results from ad-hoc acquisitions of the portfolio company. The fact that the portfolio company's debt is up by EUR 42.1 million is largely due to the financing of the acquisitions referred to earlier and to a few other companies increased financing requirements in the course of the pandemic. Our portfolio is broadly diversified by now. Our 4 core sectors only account for just under half of the portfolio value with close to 40% in the new focus sectors. As mentioned, companies in the broadband telecommunications sector are hardly affected by the pandemic or not at all. Hence, their share in the portfolio value rose by 7 percentage points since the end of the first quarter to reach 29% on the current reporting date. DBAG's co-investment commitment amounted to EUR 92.1 million as at 30 June. DBAG financial resources and the existing credit line cover all but EUR 25.6 million of this amount. Investment entity subsidiaries have further financial resources in the amount of EUR 27.9 million, solely in cash and cash equivalents, some of which are to be distributed to DBAG in the future. These funds are also available for investments. As is always the case when a new fund is launched, the co-investment commitments are increased by DBAG Fund VIII.Co-investment commitment for this fund amount to EUR 250 million during the course of the fund's investment period of up to 6 years. As in the past, we expect to be able to finance a significant part of the commitment using returns from this total. Additionally, we are currently exploring various debt and equity financing options for these commitments and the funds required for long-term equity investments.Net income from Fund Investment Services showed a more pronounced increase than expected, from EUR 1.6 million in the previous year to EUR 6.6 million in the first 3 quarters of the current financial year. So the income from Fund Services remained largely unchanged. The figure does not include any income from DBAG Fund VIII. The negative balance of other income expense items was down by EUR 4.8 million year-on-year. This was due mainly to lower provisions for variable remuneration in this reporting period and to expenses for severance pay in the previous year that were not repeated in the reporting period.Travel and hospitality expenses were notably lower over recent months. From the start of DBAG Fund VIII's investment period, DBAG will receive fees for advising this fund. At the same time, fees for advising DBAG Fund VII are now calculated on the basis of the capital invested as opposed to on the basis of the committed funds. Net income from Fund Services will increase by EUR 2.3 million due to the additional income generated from DBAG Fund VIII in financial year 2020.That brings me to what we expect to see going forward. DBAG expect results for the current fourth quarter in the 2020 financial year to be influenced by negative and positive effects alike. Specifically, it cannot be excluded that results of individual portfolio companies will deteriorate further than it currently anticipated, given the course of the pandemic, which would diminish the valuation of DBAG's investment held in such companies with a corresponding negative value contribution. On the other hand, successful disposals could offset this trend. The envisage of positive earnings contribution from our segment -- from our second segment, Fund Investment Services, anticipating full year segment results in a range between EUR 8 million and EUR 9 million. This already includes income contributions from DBAG Fund VIII. Whether and to what extent the balance of these different sectors will be positive or negative cannot be predicted as yet.Based on the assumption, which is generally required, that valuation levels on the capital markets will not have changed considerably by the end of the financial year as against the levels on 30 June, we expect to close the 2020 financial year with a net asset value in a range between EUR 400 million and EUR 425 million and continue to anticipate negative net income for the full year between EUR 25 million and EUR 5 million. In light of the impact of the pandemic, we withdrew our previous dividend forecast at the beginning of May. From today's perspective, our dividend policy remains unchanged in principle. It provides for a dividend. It remains stable and increases whenever this is possible. When deciding on the amount of distribution, we take the expected inflow of funds from the 2 business segments, for example -- which are income from Fund Investment Services and net inflows after disposals, but also liquidity requirements for co-investments and securing the dividend capacity for the long run. This does not, however, rule out the possibility that the dividend proposed may differ from that based on the wording of the dividend policy in individual years that are affected by special circumstances.Allow me to summarize in conclusion. In spite of the current challenges, we believe that DBAG is very well positioned. We provide equity solutions for Mittelstand companies, an offer which we have further extended through long-term investments. DBAG Fund VIII strengthens our capabilities in the MBO business. Our portfolio is broadly diversified. Time and again, strategic buyers find attractive business models there. Not least, our investment team makes a difference. We've grown the team by adding 6 members over the past 12 months, an increase of around 30%. We are convinced that equity investments will be in strong demand over the coming months. With this, I would like to thank you for your attention.

[Thomas Franke]

Thank you. We can now start the Q&A session.

[Operator]

[Operator Instructions] We have received the first question. It is from Tom Mills of Jefferies.

[Thomas Mills, Equity Analyst]

I've got 3 questions, if you don't mind. The first question is in relation to the investment portfolio. Clearly, there's been a very strong recovery overall since March. Just on the more challenged parts of the portfolio as you see it. Could you provide some steer as to what interventions may have already been made from an equity injection perspective and whether those were done during the third quarter or afterwards? And would you anticipate any more being necessary? That would be the first question. The second question is on the M&A market. You're noting an encouraging partial bounce back in activity levels there. I just wondered if you're seeing any sectoral biases to that bounce back. And then the third question is just in relation to the financing requirements that you've highlighted. I just wondered if you have a target mix of equity and debt financing in mind with that. And are there any particular segments that you see as particularly compelling for investment in the nearer term?

[Susanne Zeidler, CFO & Member of the Management Board]

Okay. Thank you, Tom, for your questions. I'll start with your first question regarding the interventions made by equity injections by DBAG. In total, we backed -- and every figure I give you now includes equity injections before 30 June and after 30 June until today. We injected, in total, from DBAG's balance sheet EUR 4.4 million. In addition, the respective funds added EUR 11.2 million to the 7 portfolio companies, which sums up to EUR 15.6 million equity investments from our side in total. These 7 companies also received an amount of EUR 58.7 million from the KfW, which is the state-backed credit institute, providing German economy or the enterprises with the security program from the German government. So the amount I mentioned, 7 companies, especially busy in those areas, which are automotive and mechanical plant and engineering.The second question covered the M&A market and whether we see sectoral differences. Yes, we do see it. The recovery in the market we see since half -- mid-half of June, especially covers -- touches companies in newer industries. So far, we didn't see any deal opportunities in the areas of automotive and mechanical plant and engineering. Those industries who suffer most from the pandemic are currently for us not visible on the M&A market. Regarding financials, whether we have a target mix of financing and equity, I would like to refer to our financing strategy, which is published in our annual report. And that is a mix of a credit facility, which enables us to bridge the cash inflows from disposals and cash outflows for new investments and equity financing from the capital markets. And I would like to refer to the situation 3 years ago, when we started investment in DBAG Fund VII, which also mentioned significant increase of commitments for DBAG. And there also, we had a mix of these 2 options.

[Operator]

The next question is from Tim Dawson of Helvea.

[Tim Dawson, Analyst]

One small follow up, and I apologize if this is in the detailed financial report, but I haven't had a chance to read through yet. But in the 6-month figures, there was an impact on the results from bonus accruals, which were reduced for the -- in the Fund Investment Services division. Is there any impact in the third quarter? In other words, have you reinstated some of those bonus accruals that were eliminated at the 6-month stage?

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. Thank you, Tim. Yes. Of course, there is an impact in the fourth quarter. As you see, we expect net income in the range of between -- a negative net income for the entire financial year in the range between EUR 25 million and EUR 5 million, which means if the positive end of the range comes out that we expect a positive result for the fourth quarter. This will be driven especially by the Fund Investment Services business segment and, hopefully, by some positive impact from the portfolio, regardless any contribution from multiples. And as long as we have positive index, as long as we see transactions, for example, the KPIs, these KPIs trigger the variable remuneration of the -- of our team members, especially the investment team members. And so you may assume that if we report on a positive result, that is the net effect of positive top line and an increasing variable remuneration in personnel expenses.

[Operator]

The next question is from [indiscernible] Investment Banking.

[Unknown Analyst]

I have the first question regarding Slide 8, where you mentioned decoupling from current price levels. Can you please explain what you mean there? Is it -- are you comparing public and private multiple -- M&A multiples with publicly traded multiples there? And then my second question is regarding Slide 12. I just have the feeling that your core sectors, what you call core, is really not that core anymore. I mean -- and my question is whether you are considering to kind of refresh the way you look at this and highlight what is really the core going forward, given your rising investments in broadband and new technologies and medtech away from the more classical old economy sectors? And thirdly, I would like to better understand if -- in your commitments, which you highlight on these double bar charts, the debt support for companies in trouble is included or not.

[Susanne Zeidler, CFO & Member of the Management Board]

Okay. [ Margarite ] thank you for your questions. I'm not sure whether I understood the first question for technical reasons because it was -- can you please repeat it again? Thank you.

[Unknown Analyst]

Can you hear me now? Better?

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. Yes, it's perfect. The second and third are understood, but the first one was a bit difficult.

[Unknown Analyst]

Yes. On Slide 8, the fourth box you mentioned that the multiples are higher but decoupled from current price levels. So I don't understand what you're trying to say.

[Susanne Zeidler, CFO & Member of the Management Board]

Okay. Okay. Okay. So thank you. So I start with this question decoupled from current price level for enterprises. And I would like to give you an example for 2 core sectors in order to make sure what I mean. For the automotive sector, we saw multiple and EBITDA multiple on 30 September of 7.4. On 30 June, we see a multiple of 11.1. For mechanical plant and engineering, our multiple on 30 September was 7.2 and on 30 June 9.3. And when I talk about that these multiples might have decoupled from current price levels for enterprises, I would like to say that I cannot imagine that we will be able to sell companies in those sectors at these price levels, at these EBITDA levels in the current circumstances.

[Unknown Analyst]

I understand. So these are EBITDA multiples always yes?

[Susanne Zeidler, CFO & Member of the Management Board]

What I -- the figures I just mentioned were EBITDA multiples. Regarding your second question, referring to slide number...

[Thomas Franke]

12. The core sectors.

[Susanne Zeidler, CFO & Member of the Management Board]

The core sectors, whether or not we will change the name, for example, or focus more on different sectors. Okay. The name focus sector expresses pretty well what we do. We focus on new sectors, but nonetheless, for DBAG's history, the core sectors are called so for decades now, and we did not focus on finding new names for the companies in those sectors. But I think what is more important than the naming of certain groups of portfolio companies is that the market recognizes that we focus pretty much, that we diversified significantly and we invest in -- a significant part of the money entrusted to us from LPs and from the capital market in sectors which are busy in industries where the market is growing and where some niche players have significant growth potential. So the name is not so important. For me, it is more important what we do in our investment business.

[Unknown Analyst]

I was just making a point of better -- maybe better highlighting this...

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. I understand. I understand. I can ensure you that we will discuss it internally. So thank you very much for this remark. Regarding the commitments at -- you referred to Page -- to Slide 13, I believe. And you asked whether there is any further debt support for companies now the commitments are calculated. As it is used in the industry, you only compare the commitment given to a fund with the available financial resources. And if you'll say that commitment to a fund, and they include also -- no, it's a little bit difficult to explain. The commitment to a fund are the amounts that DBAG will invest alongside the entire investment period of a fund or entire -- the entire lifetime of a fund. So any equity investment, whether it is to be done for an initial investment or whether it has to be done in order to give some additional equity during the holding period is included in these commitments. So any debt support is included in this amount.

[Unknown Analyst]

Okay. All right. That's good. One more, maybe a follow-up, if you don't mind, Ms. Zeidler. The -- amongst your 6 children, sort of the 7 companies, do you see any risk that any simply has to file for insolvency once the KfW support say is -- difficult to say at this point, but is there any ones who are really, really, really on a lifeline, thanks to the KfW or they are all viable generally?

[Susanne Zeidler, CFO & Member of the Management Board]

Those business models are valued at zero for the time being or nearly zero, most of them. And of course, each situation is different. You cannot compare any company with another one. And for the time being, we are not -- we cannot say with high certainty that all of these companies will come out as a winner of the crisis. And I cannot exclude that maybe one of them may -- that we may lose, finally, the entire capital invested originally. But it's really -- I cannot give you any certainty on this. As you may read in our letter to the shareholders that coming out of the crisis will only be predictable or will be visible in the range between 6 and 18 months only from today out. That's the perspective. So I can't give you any concrete answer.

[Thomas Franke]

And I think it's fair to say that the risk is reflected in the current valuation from the point of a shareholder before we caution you by.

[Susanne Zeidler, CFO & Member of the Management Board]

So if we have a fair value of zero for any shareholder who buys the share today, there is no longer risk from such a company, for example.

[Operator]

The next question is from Stefan Scharff of SRC Research.

[Stefan Scharff, MD & Managing Partner]

I have a couple of questions. First question is the Fund VIII. There are 2 months remaining now to invest until the end of the current fiscal year. Are you optimistic to deliver, let's say, positive news flow, 1 or 2 acquisitions here? Or there's also some capital left in the Fund VII? Perhaps you can say a little bit more, as you stated in your quarterly report that some negotiations and some talks are underway. That's the first question. The second question is Slide 6 or, let's say, the quarterly report Page 24. It's about Rheinhold & Mahla. You sold the company in July, but it was below purchase price. So perhaps you can say here a little bit more. And perhaps you can say why you might not expect a better price in a later stage, say, next year? Or why you sold it now? And my final question is Page 12 of your quarterly report. You stated 17 portfolio firms with negative results. And you stated it comes from corona. Is this right for all 17 firms? Or is it just only the corona case? Or are there some other points to mention here?

[Susanne Zeidler, CFO & Member of the Management Board]

I'm just noting the question, and then I come back to your answer -- with the answers. Okay. Thank you. Stefan. Starting with your first question regarding Fund VIII and whether there are some newer acquisitions underway. As I already mentioned at the very beginning, M&A activity regard mid-June. And this is not only true for add-on acquisitions in our portfolio companies, but also for our investment team, and we are currently working very intensively on 2 possibilities. And as always, I have to say, it is only secure once we have signed the SPA. And so, yes, this is not the case. We are always cautious with any announcement so far. But if you assume that we will be able to sign both of these opportunities, one of them will be the -- for Fund VII and another one for Fund VIII. And as we are already very busy working on these opportunities, we thought it was right to suggest to the Guernsey GP to start investment period of Fund VIII. Question number two, regarding Rheinhold & Mahla, with the signing of the exit in July below purchase price, yes, this is not a typical DBAG case. Even though in the past 20 years, we saw such cases. Why did we sell it now? Why didn't we wait until we got near? I can tell you that Rheinhold & -- now I can tell you that Rheinhold & Mahla is one of the companies in -- which is seriously stricken by the pandemic. You know the company is busy, is -- makes interiors of cruise ships, and this industry is covering heavily from the pandemic and so is the impact of our portfolio company of Rheinhold & Mahla is very, very strong. And we -- so in this -- and this means that it needs a lot of attention by our investment team members. And our expectation is not that this industry will recover very quickly. And therefore, we were happy to secure even this pretty low purchase price for DBAG and the fund because we do not expect that it will be better in the midterm. And until this -- until a later exit would be possible, it will need further attention of our investment team, and this means that this capacity cannot work on new or better transactions. So our expression was -- our idea was this is the best outcome for this portfolio company. And we hope that the closing will be done until the end of this calendar year. And this will lead to another uplift because we did not take into account the entire purchase price on 30 June, but there's only a slight single-digit amount to be expected in the coming months.

[Stefan Scharff, MD & Managing Partner]

Okay. Just closing until end of September or closing until end of December?

[Susanne Zeidler, CFO & Member of the Management Board]

Stefan, I spoke about this earlier, this makes some more time in this case. But -- so it would be fine if we got it until September, but I do not want to raise your expectations. We expected until the end of the calendar year, maybe in the first quarter of the new financial year. If it comes earlier, the better it is. Okay? And regarding the third question, I'm not sure whether I understood what you mean. You talk about the 17 firms. And you mean whether the negative value contribution is only caused by the pandemic or also by other reasons. Those companies and -- with tougher notes from the pandemic are the business models, are the automotive suppliers and the mechanical plant and engineering companies and the iron foundries. And these companies, especially the first 2 groups, saw already a difficult situation in the last financial year. So some of these companies have already been valued below cost by September, by the end of September '19. And now the pandemic comes on top. So I would like to say it's a mix, but I can't distinguish -- I can't split the figures and say the effect of the -- of this is so -- is such an amount of million and of the pandemic is on top another amount. This is not possible to make any split like this.

[Stefan Scharff, MD & Managing Partner]

I see. I see. And regarding the dividend, do you think we have a clearer picture in December, if we speak about the annual report?

[Susanne Zeidler, CFO & Member of the Management Board]

I'm quite sure that we will have a clear picture then because you know that our Supervisory Board has to agree to -- with the proposal of the Management Board. And I expect that we will publish the new dividend with the new report. I'm sure.

[Stefan Scharff, MD & Managing Partner]

Okay. And new dividend means not no dividend? Or is this too much to say for the moment?

[Susanne Zeidler, CFO & Member of the Management Board]

I think I can say that it will not be zero, but it will not be -- if you listen to what I said, I said that yields in special circumstances may call up to suggest to propose a dividend to the AGM which might not be in line with the literal understanding of our dividend policy, which means stable or increasing, whenever possible. It is such a challenging year for our portfolio companies. Transaction activity was so low. So you should not expect too much in this -- on this behalf.

[Stefan Scharff, MD & Managing Partner]

I see. It's not only challenging for you, for the whole country.

[Operator]

The next question is from Jasko Terzic of Bankhaus Lampe.

[Jasko Terzic, Analyst]

Some questions left. And I would like to ask them one by one. Well the first question may be getting back to your explanation on multiples. You said that multiples to some extent are detorted and doesn't really look at if they are obtainable currently. With these remarks, have you adjusted the multiple change in your source analysis? Or have you used market multiples in order to arrive at the EUR 105 million deviation in Q3?

[Susanne Zeidler, CFO & Member of the Management Board]

We have used the market multiples. We did not adopt them. But I have to tell you that we do not use the market multiples explicitly, but we use them as a calibration -- for calibration because we believe that if we invest into a company, for example, which is -- I'll give you an example with an entry multiple of, let's say, 7, and the market multiple is 10 at this point of time. We would not increase valuation at the next reporting date in order to bring the multiple at the market level, but we use the market development for calibration of our entry multiple, yes? So our automotive companies are not valued with a multiple of 11.1, but the 11.1 are used to calibrate our entry multiple, yes, in order to reflect the price change in the industry for assets in this industry.

[Jasko Terzic, Analyst]

Okay. But you have a quite sustained approach...

[Susanne Zeidler, CFO & Member of the Management Board]

And then we result to adopt these multiples to -- because of this calibration model, and these multiples lead over the entire portfolio to the amount of EUR 105.1 million multiple effect.

[Jasko Terzic, Analyst]

Okay. So it's pretty much the same approach as in Q2 and in Q1 and before?

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. It is the same approach, not forever because we introduced this methodology some years before, but I don't remember the reporting date. But I think it was when we adopted the IFRS valuation guidelines because they suggest the calibration of the multiples.

[Jasko Terzic, Analyst]

Okay. And then second one also is the source analysis on that change. To me, it looks as if those minus EUR 32 million in Q3 and minus EUR 42 million after 9 months is historically an outstanding figure. So we are also in outstanding times, I understand that. But just to get a feeling what happened here and maybe also an indication from you if this is the sustainable value or that it might reverse looking into Q4?

[Susanne Zeidler, CFO & Member of the Management Board]

As a change in -- you have to notice that these EUR 42.1 million are largely influenced by the fact that several add-on acquisitions at the level of -- especially 2 ECF portfolio companies have been closed and had to be taken into account by the fair value assessment. And these add-on acquisitions have been financed by the portfolio companies on their own, not by additional equity. And this is the amount of 32 -- EUR 31.6 million, which is mentioned on Slide #11. The amount of debt will remain, of course -- yes, the total amount of debt will be -- will remain until it is repaid by the portfolio company. But as an effect of change in debt, it is extraordinary in 1 quarter to have EUR 31.6 million because we do not see every -- in every period such an amount of add-on acquisitions done by portfolio companies and finance on their own. So it is not a sustainable level, I would like to say as a change in debt from add-on acquisitions. So for a sustainable level, you should have a look at former quarters or former reportings and try to deduct an average figure from other periods, maybe on basis of an average portfolio company because the portfolio grew overall. So it's not useful to look at the absolute amounts, I believe.

[Thomas Franke]

Usually, we don't get any dividends from the portfolio companies, and they use their -- that cash to delever. So usually, this should be a small figure.

[Jasko Terzic, Analyst]

Okay. That's very helpful. And my final question is regarding your outlook, which is, to some extent, implying improvement. Is it purely your assumption of earnings improving further? Or is there a different driver that could explain, let's say, the upper end of your guidance?

[Susanne Zeidler, CFO & Member of the Management Board]

I would like to say there are -- I would like to mention 3 significant effects. All the other effects are of minor importance and 2 of them are positive and 1 is negative. The 2 positive effects is -- the first 1 is that we see an increase in management fee income due to DBAG Fund VIII, yes? The net effect of EUR 2.3 million already mentioned. We see a slightly positive effect on portfolio valuation due to -- from some, yes, positive expectations for a few -- a small number of portfolio companies, leading to a positive gain on valuation in the fourth quarter. And this is partly -- these 2 positive effects are partly compensated by the higher variable remuneration accrual we have to take into account, and the net effect is reflected then in this negative net income between minus EUR 25 million and EUR 5 million, which means if the positive expectations come true, we see a positive net income in Q4 of some EUR 20 million.

[Thomas Franke]

And to give you another information. The positive effect on the portfolio value is partly due to ongoing talks with potential buyers of portfolio company. And the question is what would be the outcome of these negotiations, and we can't foresee that in detail. And this might also have an impact on where we end up in that range.

[Jasko Terzic, Analyst]

Okay. But you have no explicit assumption regarding change in earnings in that respect?

[Susanne Zeidler, CFO & Member of the Management Board]

No. It will be a mixed picture in our expectation, positive and negative effects. But the main effect is that we anticipate some positive effects from ongoing negotiations with buyers of portfolio companies.

[Operator]

As there are no further questions at this time, I would like to hand back to you.

[Thomas Franke]

Okay. Thank you. So we will talk to each other by the latest at the 30th of November when we will publish our full year figures. Until now, all the best.

[Susanne Zeidler, CFO & Member of the Management Board]

And we thank you very much. All the best from my side too. Bye-bye.