ONEX CORPORATION (ONEX.CN) – Long

Last Sale: C$62/sh

Market Cap: C$4.9b

TEV: C$3.5B (C$1.4B Net Cash)

30 Day Avg Daily Volume: 187k shares/day (~C$12mm)

Investment Horizon: ~3+ years

(Please note: C$ = CAD; $ = USD)

Summary

Onex Corp (ONEX) is a Toronto-based alternative asset manager with total AUM >$50B, of which ~$8B is Onex’ own investing capital.  For reasons that are both self-inflicted and external, the shares trade at the same level today as they did in 2014 – this is despite growing invested capital per share at a ~10% CAGR during this timeframe (from C$63/sh at 12/31/14 to C$130/sh at 12/31/22), and increasing fee-generating AUM (FGAUM) from $15B to $34B (at 12/31/22).  While near term catalysts are not in sight and PE fundraising headwinds are significant, the shares are very cheap, and at a >50% discount to the value represented on their balance sheet, trade more akin to a poor closed-end fund than a equity stake in a reputable alternative asset manager.  While shares may remain a value-trap in the short term, I believe the risk/reward at the last sale is quite asymmetrical.  If nothing else, I expect the company to continue cannibalizing their share count given the massive discount to ‘hard’ NAV the stock trades at.  And, should the PE fundraising environment begin to show signs of life, ONEX shares could work quite well.

ONEX – Net Asset Value Build

Why This Opportunity Exists?

• PE fundraising has grinded to a halt across the industry.  ONEX started fundraising efforts for their largest PE strategy (Onex Partners VI) last year, and demand has been underwhelming to say the least – their target was to exceed the Partners V fund ($7.2B), and to date they have raised only $2B, only $500mm of that is from 3rd parties.

• Recent Onex Partners PE funds results have been unimpressive.  In particular, the OPIV Fund (launched in 2014) has generated a disappointing 8% net IRR.  OPV (launched in 2018) has performed better with a 15% net IRR – those results are decent but certainly unspectacular compared to other funds of a similar vintage.

• Departure of key investors.  Most notably, the head of their Credit business, Jason New, left last year (he told the firm the departure was for family reasons… though he soon thereafter founded a crypto fund, which is a but strange).

• Gluskin & Sheff – Onex somewhat surprisingly announced they were abandoning plans to grow this wealth management unit, and they sold what remained to RBC.

• Slow succession planning - Founder, Gerry Schwartz, is 81 and has been slow to turn the reigns over to Bobby LeBlanc (President).  In a mildly positive development (to be voted on in May), ONEX announced that Schwartz’ controlling shares would convert in 2026, and not 2028 as was previously announced.

• Overall – I think this recent Bloomberg article does a good job at summing up what I’ve described above - https://www.bloomberg.com/news/articles/2023-04-05/buyout-pioneer-gerry-schwartz-clings-to-power-as-onex-investor-pressure-mounts?leadSource=uverify%20wall

Investment Thesis

The core points of the long ONEX thesis include:

• ONEX is a very cheap stock – as outlined above, the shares have a ‘hard’ NAV of ~C$130/sh, and that includes no value for their 3rd party asset management business, which is currently run-rating $258mm in management fees ($110mm from PE and $148mm from Credit).

• There are several reasons to believe that ONEX’ marks are reasonable and not grossly overstated.

• Their own history says they are conservative markers - a year ago ONEX said that sale of Partners’ (PE) investments were realized at 7% premium (on average) to the prior quarter’s mark, and a 16% premium to the previous 6 months mark.

• As I’ll discuss below, the company is a huge buyer of their own shares.  If management didn’t believe in their own marks, wouldn’t it make more sense to dividend the cash out like most other alts?

• While the Onex Partners PE business has had its issues, the smaller ONCAP PE business has been a very strong performer, and their Credit business continues to generally perform well and is scaling (despite the departure of New).

• The company are chronic buyers of their own shares – see table below.  Given their large GP commitment to the OPVI PE fund, share repurchases may slow a bit this year (though the company should remain material buyers of the stock).

• While their efforts have not borne fruit, ONEX has improved in the area of investor communications.  That being said, the targets that were laid out at their ’21 Investor Day need to be refreshed as it’s very clear PE fundraising goals will not be met.

• Succession planning is in the works, and once Schwartz’ control shares convert in ’26, ONEX would screen as an activist or takeout target (should shares continue to trade at a massive discount to NAV).

Business Overview

ONEX is a leading alternative asset manager that traces its roots to 1984 when current Chairman and CEO, Gerry Schwartz, founded the firm with $50 million of friends and family money after having worked for notable dealmakers Jerome Kohlberg and Izzy Asper at different stops in his career.  During its first 15 years in existence, ONEX focused on private equity investing in North America using capital from its own balance sheet. In 1999, ONEX began raising private equity funds with third party capital.  At the end of last year, the firm managed >$50B of total AUM.

ONEX is led by a capable management team that have their interests well-aligned with minority shareholders. Notably, the company has been chronic buyers of their own shares over the last two decades, and from 2020 through 2021, as ONEX shares languished, management repurchased nearly 10% of shares outstanding, which is the annual limit under Canadian NCIB regulations.

Key Risks

• ONEX remains a value trap

• Fundraising, particularly for their larger PE franchise (Onex Partners)

• Departure of key employees, or complications arising from succession planning