Onex Corp

TSX:ONEX

Earnings Call Analysis

Onex Reports Steady Progress and Strategic Share Buybacks

Onex achieved solid results in Q3, with a 3% capital return over the quarter, totaling a 9% return year-to-date, and 14% annually over five years. The firm raised $2.1 billion in fee-generating AUM and completed significant investments, including $640 million from recent deals. With $1.8 billion in cash, Onex announced a Substantial Issuer Bid to buy back shares trading below intrinsic value. The private equity portfolio saw a 2% return, but certain sectors lagged, prompting focus on liquidity and strategic capital allocation. Distributable earnings hit $267 million, driving good momentum in Q4 and beyond.

Onex's Strong Financial Position and Strategic Buybacks

Onex has delivered a robust performance in the third quarter, with cash and liquid assets amounting to approximately $1.8 billion, representing about 22% of its investing capital. This strong liquidity has enabled the company to execute a Substantial Issuer Bid (SIB), allowing it to buy back shares at what it perceives as an attractive discount to intrinsic value. Over the last 12 months, Onex has repurchased around 4 million shares, equivalent to 5% of its outstanding shares, at an average price of CAD $90.80, returning substantial value to its shareholders.

Solid Returns Across Private Equity Investments

In Q3, Onex's private equity (PE) portfolio recorded a net gain of $96 million, reflecting a 2% return. Within the last year, the portfolio demonstrated double-digit returns in financial services, industrials, and business services segments, although healthcare and consumer segments faced challenges. Over the past five years, Onex has achieved an annual return of 14% per share from its investing capital, underscoring its consistent performance even amid market fluctuations.

Growth in Credit and Asset Management

Onex's credit investments supported a $29 million net gain in Q3, translating to a 3% return. This growth was largely driven by its structured credit strategies, especially collateralized loan obligations (CLOs). The asset management arm ended the quarter with fee-generating assets under management (AUM) exceeding $34 billion, boosted by $2.1 billion raised in Q3 from various funds. A notable achievement was a substantial increase in structured credit AUM, which grew 22% year-to-date.

Future Outlook and Expected Growth Drivers

Looking ahead, Onex anticipates that the favorable conditions in the CLO market will persist, with expectations of maintaining its position as a top 10 global issuer. The company has so far completed 23 transactions in 2024, raising $5.6 billion in new fee-generating AUM while extending another $5 billion. Moreover, Onex aims to continue enhancing its private equity business, with focused efforts on increasing fee-generating AUM through discipline and strategic decisions.

Distributable Earnings and Carry

Onex reported distributable earnings of $267 million in Q3, primarily driven by realizations in its private equity investments and regular distributions from CLOs. The company ended the quarter with accrued carried interest of $270 million, demonstrating its potential for value creation as performance fees could significantly boost future earnings. The structured credit business is highlighted for its scalability and has been identified as a critical area for growth in the coming years.

Capital Allocation Strategy for Future Growth

Onex is committed to prudent capital allocation, aiming to leverage its cash position for both investments and share buybacks. The management emphasized continuous investment in core areas and hinted at potential fundraising initiatives to bolster its asset management and investment strategies. While specific targets for 2025 remain under discussion, the management is focused on aligning resources to maximize returns for shareholders.

Challenges and Market Positioning

Despite a solid performance, Onex acknowledged challenges in the PE sector regarding realizations. However, the company has returned over $2.7 billion of capital to limited partners year-to-date, illustrating its commitment to value creation and effective management. The strategic positioning in various sectors, alongside diversification across more than 40 businesses, allows Onex to navigate market volatility and maintain a balanced portfolio.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to Onex' Third Quarter 2024 Earnings Results call. [Operator Instructions] As a reminder, today's program is recorded.

And now I'd like to introduce your host for today's program, Jill Homenuk, Managing Director of Shareholder Relations and Communications at Onex. Please go ahead.

[Jill Homenuk, executive]

Thank you. Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Bobby Le Blanc, Onex' Chief Executive Officer; and Chris Govan, our Chief Financial Officer.

Earlier this morning, we issued our third quarter 2024 press release, MD&A and consolidated financial statements, which are available on the Shareholders section of our website and have also been filed on SEDAR. A supplemental information package is also available on our website.

As a reminder, all references to dollar amounts on this call are in U.S., unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward-looking statements contained in today's presentation and remarks.

With that, I'll now turn the call over to Bobby.

[Robert LeBlanc, executive]

Good morning, everyone. Onex had a solid third quarter, with sustained progress on realizations, investing activity and fundraising in our core areas. We continue to align our business to areas where we have the greatest right to compete, while benefiting from a strong balance sheet and a considerable liquidity position.

This morning, we announced a Substantial Issuer Bid, or SIB. While we've been very active with our NCIB, buying back nearly 4 million shares over the last 12 months, the SIB allows us to accelerate and expand our efforts, while our shares continue to trade well below intrinsic value and provides all shareholders an opportunity to participate in our buyback activity.

Considering our pro forma cash position of over $1.8 billion, we are confident we can execute on the SIB, while continuing to effectively invest in other areas we choose to prioritize. Strategic capital allocation was a key theme of my remarks at last year's Investor Day. To continue to grow and create value for Onex and our stakeholders, we need to be smart and disciplined in how we use our capital.

Turning to our business. Across our platforms, we are seeing good momentum and positive outcomes. Our structured credit business, led by Ronnie Jabber, and supported by a talented and experienced team of credit professionals, has become a market leader.

In 2024, the team has already completed 23 transactions, raising $5.6 billion of new fee-generating AUM and extending another $5 billion. Within structured credit, we have been consistently punching above our weight, up slugging bigger and more established players. For the second consecutive year, we expect to be a top 10 global CLO issuer.

The outlook for continued growth remains strong, as the CLO market remains very attractive for managers like Onex with experience and track records of successfully managing through cycles. Year-to-date, our team has increased our structured credit fee-generating AUM by 22%. This is an achievement that should not be overlooked by our shareholders.

Looking at fee-generating AUM more broadly, we are also seeing positive momentum in our private equity businesses. ONCAP V now has over $1 billion in total commitments, and the Onex Partners Opportunities Fund is approaching $1.2 billion, including pending co-investment commitments. Both PE teams have been active with investing and realization activity.

Onex Partners recently closed its first investment for the Opportunities Fund, Fischbach, with another, Farsound, expected to close shortly. We continue to emphasize our priority sectors and investment thesis, and both transactions are prime examples of this.

On realizations, Q3 saw the close of the ASM and Englobe sales and a partial realization of PowerSchool, which closed after quarter end. The PE industry continues to face challenges around realizations. So I'm particularly proud of what our teams were able to accomplish on this front.

Year-to-date, we've returned over $2.7 billion of capital to Limited Partners, with Onex' share being over $900 million. This is an accomplishment that speaks to the quality of the portfolio and our ability to deliver for our clients in all market environments.

The strategic alignment of our businesses and balance sheet to our long-term objectives continues to be my top priority. Onex will win through smart and disciplined decision-making related to how we allocate our resources. We remain committed to delivering attractive returns for our investors and shareholders.

With that, I'll now turn it over to Chris.

[Christopher Govan, executive]

Thanks, Bobby, and good morning, everyone. Onex ended Q3 with investing capital per share of $113.37, reflecting a return of 3% in the quarter and 9% over the last 12 months. Investing capital per share has now returned 14% annually over the last 5 years, squarely in the rein of through-cycle returns we target.

We made good progress on the realization and investment fronts since June. Onex Partners IV completed the sale of ASM and in October, realized about half its interests in PowerSchool as part of its privatization. Onex Partners also completed its investment in Fischbach in October, the first investment in the Opportunities Fund. Together with ONCAP sale of Englobe and several smaller PE distributions, these transactions generated $640 million in net proceeds to Onex. This brings our cash and near cash position to about $1.8 billion or 22% of investing capital today.

Onex repurchased approximately 2.2 million shares in Q3. Over the last 12 months, share repurchases totaled over $3.9 million or 5% of outstanding shares. These repurchases were completed at an average price of CAD $90.80, allowing us to capture CAD 235 million of hard NAV for continuing shareholders.

The Substantial Issuer Bid announced today will allow us to take advantage of our strong liquidity and capture meaningful value by repurchasing at what we believe remains an attractive discount to intrinsic value, while also leaving us with a lot of capital to pursue other opportunities.

Looking at our investing returns for private equity, our PE portfolio produced a $96 million net gain or 2% return in Q3. Returns in the quarter were driven by OP V as well as direct investments. Looking at returns over the last year, we saw double-digit returns across 3 of our core verticals: financial services, industrials and business services, while experiencing more challenging results in our health care and consumer verticals. At any moment in time, certain verticals or businesses will always have more or less momentum, but we benefit from the diversification of over 40 businesses in the PE portfolio.

Turning to credit results. Our credit investments delivered a $29 million net gain or a 3% return in Q3. The gains were driven by our structured strategies and particularly, by our CLO investments, in line with the return for the leveraged loan market this quarter. On the asset management side of the business, Onex ended the quarter with just over $34 billion of fee-generating AUM. The increase over the prior quarter reflects new commitments made to ONCAP V and the Onex Partners Opportunity Fund as well as several new CLOs. In total, Onex raised approximately $2.1 billion of FG AUM across private equity and credit in Q3.

A good portion of the FG AUM growth came from our CLO business, which, as Bobby noted, continues to have a stellar year. Onex has raised or extended over $10 billion of fee-generating assets in its CLO platform this year across 23 separate transactions. This includes $1.7 billion of FG AUM from 3 CLOs closed in Q3, and the pricing of our 11th European CLO will add approximately $560 million in fee-generating assets when it closes in Q4.

I think it's worth taking a deeper dive into the extension activity in the CLO platform so far this year. At the start of the year, about 65% of our CLO AUM was in its reinvestment period. Once the CLO is out of its reinvestment period, the AUM begins to decline as the CLO pays off its liabilities. This decline decreases our fees and reduces returns for CLO equity investors, including Onex.

Through the team's hard work, we now have about 85% of our CLO AUM in its reinvestment period. And importantly, the weighted average reinvestment period for these CLOs now ends in October 2027. Extensions typically don't have a big impact on FG AUM growth, but rather, they reflect the quasi-perpetual nature of CLO AUM and the significant value of our structured credit business.

Turning to fee-related and distributable earnings. Total FRE was at breakeven for Q3, with $6 million of earnings from the asset management platform. The improvement from Q2 reflects increased fees from ONCAP V and structured credit, together with the continued impact of our focus on efficiency.

Run rate management fees were $187 million at quarter end, up $8 million from Q2, driven by the additional CLO FG AUM previously discussed. As for distributable earnings, Onex generated $267 million of DE in Q3, driven by realizations in PE as well as recurring CLO distributions.

Finally, an update on Onex' incentive fee and carried interest opportunity. We ended Q3 with $270 million of accrued carry, which reflects $22 million generated in the quarter, primarily from Onex Partners V and the Ryan Continuation Fund. As a reminder, Onex has over $32 billion of private equity and credit AUM, subject to carry or incentive fees, which provides a meaningful opportunity for value creation going forward.

In summary, we had a solid quarter of progress across both investing and asset management, and the teams are working to ensure that continues through year-end.

That concludes the prepared remarks. We'll now be happy to take any questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Nik Priebe from CIBC Capital Markets.

[Nikolaus Priebe, analyst]

The pricing range on the modified Dutch auction straddled the closing share price yesterday. At one point earlier today, the share price had reached the upper end. How is the determination made on that pricing range? Like if the stock advances higher, do you have flexibility to bump the range? Otherwise, you risk limited take-up? Like I'm not an event-driven guy, so just some insight on that dynamic would be helpful and interesting.

[Christopher Govan, executive]

Yes, I think you've got that right, Nik. We do have the ability to amend the bid at any point in time, which then extends the end period. But we gave a lot of thought to that range. We reflected on our own Normal Course Issuer Bid buy -- stock buyback activity over the last year, the liquidity in the stock and the run-up that it's had over the last month. And we think we've chosen a range that is going to be helpful for some of our shareholders who want liquidity at these levels.

But at the same time, we're very happy with the range from the perspective of the value it's going to create for our continuing shareholders. So it's not scientific. You got to have some judgment, but we're very comfortable with where we set the range.

[Nikolaus Priebe, analyst]

Okay. Fair enough. And then just turning to the private equity returns. It sort of lagged the public benchmarks in the quarter. Was there anything that stood out there as an outlier in terms of the sequential change to the individual portfolio company marks?

[Robert LeBlanc, executive]

Nik, it's Bobby. Sorry. Go ahead, Chris. Go ahead. Go ahead.

[Christopher Govan, executive]

Yes. And I was just going to confirm that as we talk about on most calls, we do tend to lag big moves in the public markets, given the way we value some of our assets using DCF. But I'll let Bobby talk to the portfolio as a whole or anything specific.

[Robert LeBlanc, executive]

No. But Chris is right. That's exactly what I was going to say. So we're on the same wavelength. But in any given quarter, there's also just pockets of earnings volatility. We had a little bit of that on our health care portfolio and some consumer businesses from past funds. But overall, again, I think it's more of a lag effect than anything fundamental.

[Nikolaus Priebe, analyst]

Yes. Okay. Fair enough. And then just last one for me. I was wondering if you could just tell us a little bit more about what's being done internally to incentivize and retain investment personnel on the Onex Partners side, just in light of the stalled fundraising and how you're balancing that against the objective of stabilizing FRE as well?

[Robert LeBlanc, executive]

Yes. So I think we've actually done a very good job on that front. As people have left the firm over the last year or 2 that were part of that team, we were able to reallocate carry and OP V and of course, the carry and the opportunities fund where, given the size of that team and the dollars that we have to manage, I think we're in pretty good shape on that front.

[Operator]

And our next question comes from the line of Graham Ryding from TD Securities.

[Graham Ryding, analyst]

On the private equity fundraising side, are you complete or largely complete now on the Onex Partners Opportunities Fund and ONCAP V?

[Robert LeBlanc, executive]

So let's start with ONCAP. There'll be fundraising for about another 3 months, and we do expect more commitments within that 3-month period. Relative to where we are today, we're actually quite -- feeling quite good about the next 3 months there.

And this is the same time line for the opportunities fund? My guess is it won't have -- ONCAP probably has a bit more upside from this point forward than OP in terms of incremental dollars, but they'll both be wrapped up in the first month of January.

[Graham Ryding, analyst]

Okay. Understood. Has that been extended? Or I thought you were sort of looking to wrap them up around -- has that been extended because of demand or no?

[Robert LeBlanc, executive]

No, I don't recall exactly when they were extended, but they were, and that's where our LPs for both funds came out on the extension.

[Graham Ryding, analyst]

Okay. All right. Understood. And then how about -- just on the private equity side, the emphasis in 2025, are you targeting any PE fundraising? Or is portfolio realizations more of the focus next year?

[Robert LeBlanc, executive]

Yes. I think it's going to be capital deployment, right? And portfolio realizations will be more of the focus in 2025. But I also think as a firm across our PE platform and our credit platforms that are supported by our sales team, we kind of need to be fundraising all the time, not just when the funds are coming due. And I think you'll see us doing a lot more of that going forward. But there won't be any fundraising per se for new dollars for those 2 platforms in 2025.

[Graham Ryding, analyst]

Okay. Excellent. Staying on that theme then, as you do monetize some of your portfolio investments in 2025, particularly around Onex Partners, do you envision remaining active on the share buybacks if your cash levels build and your stock continues to trade below NAV? Or do you feel some need to keep some powder dry for 2026 if you are to reinitiate fundraising for Onex Partners VI?

[Robert LeBlanc, executive]

Yes. So you're hitting on probably the thing that I think about most these days, which is our capital allocation, just given our pristine balance sheet and our liquidity position. Again, anywhere in the ZIP code or -- that our shares trade in, I think you should expect us to continue to be active buyers of our shares.

And then the question really become is, what do we do with our capital going forward to make sure we're being efficient with the cash and we don't have too much cash drag going on related to our investing activities across PE and credit? I'm working on that real time. And I promise you and all shareholders that as that becomes more clear, that strategy becomes more clear, you'll be the second to know after Chris.

[Graham Ryding, analyst]

Okay. Understood. Chris, just on the FRE, is this level of compensation and overall expense a reasonable run rate? Or is there any timing related you would call out maybe for this quarter? And can you generate positive FRE in 2025? Or is that more likely a 2026 dynamic dependent upon fundraising around Onex Partners VI?

[Christopher Govan, executive]

Yes. So there are a few, I'll call it, out-of-period adjustments in Q3 related to -- just you make small compensation adjustments later in the year as you get towards year-end and you have to catch up right back to the beginning of the year. So there's probably, call it, like $2 million across the firm that I would say is a bit of a timing benefit in Q3. So the run rate is probably more like a $2 million loss overall.

As it relates to 2025, we're actually right in the middle of budget -- setting budget. So I don't want to get too far ahead of that. But I think what you're going to see is continued discipline across private equity and a focus in private equity of increasing FG AUM where we can and sometimes outside of normal, I'll call it, fund structures. So I think we've got [ lump sum ] there.

[Robert LeBlanc, executive]

Think continuation vehicles and things like that for that front, just to give a color.

[Christopher Govan, executive]

Yes. And then I think we've got great momentum in credit to continue to build FRE there, particularly on several of our businesses where as we scale a tremendous amount of the top line, increase will drop to the bottom line. So I think we've got good momentum to improve on that going into 2025. I don't want to give you a number quite yet.

[Graham Ryding, analyst]

Okay. Understood. And my last question, if I could, just CLO fundraising have been very strong this year, obviously. I think it came in much higher than your original $2 billion to $3 billion target. So what would you attribute that to? And what do you think is a reasonable target for 2025 for that business?

[Robert LeBlanc, executive]

Yes. So we don't have a budget yet for '25. But I'd say what drove it this year are 2 things. One, there's just a very high demand for CLO paper relative to historical norm. I don't think this will be a normal year when we look back. I think a normal year will be something a bit less active than this today.

But I must tip the hat to the team. They were able to take advantage of this market, continue to gain market share. And once again, we'll be a top 5 or 10 issuer globally of CLOs. And the active management they've had to extend existing CLOs and [ fee stream ], as Chris mentioned in his remarks, do create a quasi-permanent capital element to that business, which is really attractive.

And it's important to also note that in spite of all of that growth, our metrics around impairment and size of impairment remain industry-leading. So it's really just kudos to that team and how well they've done since they've taken over managing that platform.

And by the way, a very scalable business as we move forward. So when you think about 2025 FRE, think about that really being a business -- that part of credit -- structured credit being a highly profitable business, and we're working on ways for next quarter to show you that in more detail.

[Operator]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Bobby Le Blanc for any further remarks.

[Robert LeBlanc, executive]

Thank you very much for taking the time. Thanks to our team for helping put all this together for our earnings call today, and we look forward to catching up with you next quarter. Any questions in the meantime, feel free to reach out to Chris, me or Jill. Thank you very much.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.