ONEX - Private Equity

[Xerxes]

Didn't see a thread on this; so started one.

 

Onex is a Canadian private equity founded by Gerry Schawrtz, who was a one-time employee at Bear Stearns, before coming back to Canada. You dont hear much about Onex, given that most of its investment are not household names. But when do they make news it is usually in the aerospace business, as it did when they bought West Jet back in 2019.

 

One might think of them as naive for getting into aerospace, but they do have a good record. Onex was responsible to curve out the aerostructure business out of Boeing, now better known as Spirit Aerosystems. It was a multifold gain for Onex.

 

"The $375 million investment from the Onex Partners I Group generated $3.2 billion of total value, resulting in an 8.5 times gross multiple of capital invested and 200.9% gross IRR."

https://www.onex.com/investments/spirit-aerosystems

 

Another name, they did well was Skychef. While they didnt do too well with the purchase of Beechcraft from Raytheon. So, yes, they bought West Jet on the top of what is known in hindsight to be the top of market, but they got more going for them. In any case, while West Jet's enterprise value was around $5 billion, Onex equity that was put at risk for that deal was a mere $345 million. Nonthesless suffice to say, i think Onex Partners V wont have a great return given when they bought West Jet, but that is the nature of the business.

 

2019 results:

net gain of $836 million            -- shareholder capital stood at $7.2 billion (or $90.2 CAD per share)

 

2020 results:

Q1: net loss of $1.1 billion        -- shareholder capital stood at $5.9 billion (or $85.2 CAD per share)

Q2: net gain of $0.689 billion    -- shareholder capital stood at $6.5 billion (or $91.4 CAD per share)

Q3: net gain of $0.515 billion    -- shareholder capital stood at $6.7 billion (or $98.7 CAD per share)

 

why now ?

 

In Dec 2019, (pre-covid), Onex shareholder capital stood at $7.2 billion or $90 CAD per share.

In Sept 2020, (post-covid), Onex shareholder capital stood at $6.7 billion or $98 CAD per share.

 

So the absolute dollar value of shareholder equity has shrunk, but the equity value per share has increased as the company plowed a record $444 million into share buyback this current 2020 year. For context, total buyback since 1997 stood at $2.3 billion. Fully 9.7 million shares have been pulled out of circulation in one year. That equals five year worth of buyback from 2015-19. 

 

Share price currently stands at $68 CAD. I have personally started a 1/4 position on it, hoping that it goes down from here.

Tidbits from Q2 earning calls:

 

"Overall, the allocation of Onex's capital has remained fairly stable this year with cash and near cash now standing at nearly $2 billion or 32% of hard NAV. Although we haven't made any particularly large investments, our strong balance sheet has allowed us to commit to a handful of attractive PE investments post-COVID, and more importantly remain on the hunt for more."

 

"Although, I believe there is meaningful value associated with our asset and wealth management platforms, given where our stock has been trading, I only need to look at Onex as investing capital or hard NAV to get comfortable with buying back our stock. At quarter end marks, Onex's investing capital per share was CAD84.63. However, I'd like to go one step further and adjust for the cash and publicly traded investments within our NAV. At quarter end, these assets alone represented over CAD43 per share. Assuming nobody will argue about the value of these assets, when we can buy back our stock at around CAD58, we're effectively buying in the rest of our investing assets about CAD42 per share of private PE investments and credit investments at an implied discount of about 60%. So as you can imagine, I'm pretty happy Onex has purchased almost 4.5 million shares through the end of July. At an average cost of CAD57.94 per share. These repurchases effectively created, about CAD120 million of NAV for our continuing shareholders."

 

 

[rosemontseneca]

I like this idea. At these levels, you basically get the GP / mgmt. co for free, which ought to drive a lot of upside if they can continue to grow the platform. 

 

I see steadily increasing fund sizes and good historical returns but agree that funds IV / V seem to have some challenges.  Hopefully the middle market effort and the credit business can also scale over time.  Any thoughts on the ONEX "brand" among LPs?  I work in alternatives, and I had never heard of them until seeing this thread. 

 

 

[Jurgis]

Share buybacks are all fine, but the stock has gone nowhere for 4 years+ before Covid. Is that due to West Jet purchase?

 

Overall, how do you guys value this long term? How do I know that they have done well in the past and may do well in the future? I am not interested in short term mean reversion trade.

 

Looking at financials on TIKR it's all completely f'd up, so can't make heads or tails out of it.  :-\

[rb]

Share buybacks are all fine, but the stock has gone nowhere for 4 years+ before Covid. Is that due to West Jet purchase?

 

Overall, how do you guys value this long term? How do I know that they have done well in the past and may do well in the future? I am not interested in short term mean reversion trade.

 

Looking at financials on TIKR it's all completely f'd up, so can't make heads or tails out of it.  :-\

ONEX is the premier Canadian PE firm. In the same league as KKR, Blackstone, Carlisle, etc. But as my Private Equity professor (who ran a PE shop) said, it's good to invest in a PE fund but never invest in a PE company. Management will always rip off the shareholders.

 

As for the financials, you can't look them up. All the portfolio companies are consolidated on the PE firms financials. So if you want to know the PE firm's financials you need about a gallon of coffee.

[rosemontseneca]

Share buybacks are all fine, but the stock has gone nowhere for 4 years+ before Covid. Is that due to West Jet purchase?

 

Overall, how do you guys value this long term? How do I know that they have done well in the past and may do well in the future? I am not interested in short term mean reversion trade.

 

Looking at financials on TIKR it's all completely f'd up, so can't make heads or tails out of it.  :-\

 

Here's my thinking in round numbers.  Two value components: 1) balance sheet and 2) asset manager income

 

For the balance sheet, let's take the $1.6bn of cash and arbitrarily haircut the fund investments by 20% ($4.6bn * 80% = $3.7bn) = US $5.4bn or C$77/share.

 

For the asset manager, I take third-party run-rate fees of 238mm subtract LTM comp / other costs of 221mm to get 17mm of run-rate fee earnings.  Multiply by 15x to get $255mm of value.

 

I assume they raise $2bn per year of third party capital paying 20% carry, with 60% of carry allocated to investment professionals and 40% to ONEX corp.  I value it as an at the money option with 30% volatility, and I get $45mm of carry value per year.  If I use a 10x multiple, I get $450mm.

 

Putting it all together, I get $6bn vs. $4.7bn of market cap, or C$87/share vs. C$70 today.  I think the asset manager assumptions above are conservative, and there's a ton of upside if other products scale.

[5xEBITDA]

Share buybacks are all fine, but the stock has gone nowhere for 4 years+ before Covid. Is that due to West Jet purchase?

 

Overall, how do you guys value this long term? How do I know that they have done well in the past and may do well in the future? I am not interested in short term mean reversion trade.

 

Looking at financials on TIKR it's all completely f'd up, so can't make heads or tails out of it.  :-\

ONEX is the premier Canadian PE firm. In the same league as KKR, Blackstone, Carlisle, etc. But as my Private Equity professor (who ran a PE shop) said, it's good to invest in a PE fund but never invest in a PE company. Management will always rip off the shareholders.

 

As for the financials, you can't look them up. All the portfolio companies are consolidated on the PE firms financials. So if you want to know the PE firm's financials you need about a gallon of coffee.

 

I don't think they belong in the same league as KKR / BX / etc. at all. Onex does not really have a great reputation in the space, they are a legacy firm that continues to manage a large amount of assets, albeit with not so stellar returns. Look at the performance data for Onex Partners IV via CALPERS website. It is a 2014 vintage with a 1.1x MOIC and 2.1% Net IRR - that is pretty bad compared to a KKR 2013 vintage (9.3%, Asia focus), BX 2015 vintage (9.1%, tac opps), Apollo 2013 vintage (7.2%) just to name a few. I don't think there is really anything stellar to say about their credit business. It is very CLO heavy, and I've never bumped into them in a distressed situation. They did recently higher a new guy to fix their distressed strategy, but the jury is still out on that.

 

I'd probably look to value these guys the same way you would KKR or Apollo - can they maintain reasonable private equity returns to grow ancillary, lower fee but higher AUM, businesses such as credit. Based on their most recently reported quarterly presentation, it looks like credit AUM growth has been stalled since 2017. HYG has returned 13.5% (excl. divs reinvested) since 2017, so $52 billion current credit AUM is basically a market return, maybe less, net of distributions. So, I'd think the real key to turning around the stock is better results out of credit.

 

The middle market space is notoriously difficult, especially in the industrial / asset heavy space. Off the top of my head, KPS and HIG are two firms that have stellar performance in that space and this is overlooking several other funds with top quartile performance. It's a very hard space and I don't know if I'd capitalize earnings potential here at a very high multiple, and a key point to consider if this is planned as a main growth driver.

 

 

[Xerxes]

Share buybacks are all fine, but the stock has gone nowhere for 4 years+ before Covid. Is that due to West Jet purchase?

 

Overall, how do you guys value this long term? How do I know that they have done well in the past and may do well in the future? I am not interested in short term mean reversion trade.

 

Looking at financials on TIKR it's all completely f'd up, so can't make heads or tails out of it.  :-\

 

West Jet is pretty recent and closed late 2019.

I think as an investor, it was sitting on some cash as it has been exiting positions in the past few years, so that may have been contributed to its stock underperformance pre-covid. But really did any of the other PE's stock really outperformed except for the past 12 months. I always see market dislocation as jet fuel for these kind of firms, they are slow moving, but at some point market will reward their newer investments during market dislocation.

 

One thing that i noticed does come up with them in interviews and articles, is that compares to most U.S. based PE, they tend to own more of the equity, so often times their investment positions are consolidated into their financial, but really they are working capital. I was hoping to spend a few hours on the weekend just put their publicized investments on a spreadsheet in the past 10 years to get some sort of picture.

 

Their wealth management business is pretty small (and just starting), i wouldn't attribute any value to it.

 

[Jurgis]

But really did any of the other PE's stock really outperformed except for the past 12 months.

 

Looking at trailing 5y even without 2020, ONEX hugely underperformed SPY, KKR, BX.

Looking at trailing 10y without 2020, it's more neck to neck and who outperforms depends on exact dates.

This does not include dividends/spinoffs/etc, so possibly is quite broken comparison.

[Xerxes]

But really did any of the other PE's stock really outperformed except for the past 12 months.

 

Looking at trailing 5y even without 2020, ONEX hugely underperformed SPY, KKR, BX.

Looking at trailing 10y without 2020, it's more neck to neck and who outperforms depends on exact dates.

This does not include dividends/spinoffs/etc, so possibly is quite broken comparison.

 

Agree with that. And i didn't meant to suggest that it has been a major blockbuster.

 

If I were to go from the 2001-02 bear market to the highs 2007-08 ($14 to $33 CAD) ... and then go from the lows 2009 to 2019, ($21 to $100 CAD), did these outperformed the market from its lows and highs.

 

I am, of course, cherry picking the market bottoms, but just to say that market downturn provided them with targets to invest.

 

 

[K2SO]

But as my Private Equity professor (who ran a PE shop) said, it's good to invest in a PE fund but never invest in a PE company. Management will always rip off the shareholders.

 

ONEX management is actually required to purchase common shares in the company... the same shares that outside investors own.

 

I think the bull case is that the company should trade at a premium to NAV over time as the asset management business grows.

 

And while they may not be in the same league as the KKRs of the world, I would put them at the top of the heap in Canada, and they do see very decent deal flow. I've had clients invested in their funds in the past and they are generally very strong performers.

 

[Xerxes]

2019 results:

net gain of $836 million            -- shareholder capital stood at $7.2 billion (or $90.2 CAD per share)

 

2020 results:

Q1: net loss of $1.1 billion        -- shareholder capital stood at $5.9 billion (or $85.2 CAD per share)

Q2: net gain of $0.689 billion    -- shareholder capital stood at $6.5 billion (or $91.4 CAD per share)

Q3: net gain of $0.515 billion    -- shareholder capital stood at $6.7 billion (or $98.7 CAD per share)

Q4: net gain of $0.708 billion    -- shareholder capital stood at $7.4 billion (or $102 CAD per share)

 

I am guessing we can call the $102 CAD per share figure a NAV.

Of which $93.73 CAD is from the core Investing business (i.e. private equity, credit, etc) and a much smaller $8.85 CAD from the Asset & Wealth Management side of the business

 

2020 buyback:  Onex repurchased 9,780,411 Subordinate Voting Shares in 2020 for a total cost of $444 million (C$595 million), or at an average cost per share of C$60.86.

2021 shares outstanding stood at 90,200,53

Other Stats:

AUM at $44 billion (up 14% through M&A)

$444 million (C$595 million), or at an average cost per share of C$60.86.

 

Market cap today stands at $6.8 billion.

[Xerxes]

Good 30 min discussion with Onex president.

RBC Capital Markets Financial Institutions Conference

 

https://www.onex.com/events-and-presentations/events

 

Company is growing its asset manager business, market is not giving them credit for it. Not only that it trades at a discount to its NAV.

[Xerxes]

Presentations and Events | Onex

Morgan Stanley US Financials, Payments & CRE Virtual Conference 

Edited June 16, 2021 by Xerxes