Description

Summary

Onex Corporation has been written up several times including one year ago by Astor. I’d encourage folks to look at those write-ups for background. The stock is up about 50% since then but I believe it still represents a very favorable risk/reward. The company, based in Toronto, is one of the larger private equity businesses in Canada. It is being pruned and optimized despite a near standstill with fundraising around their (perhaps previously) core private equity business. The investing capital of the firm + the value of the credit business should be well in excess of the current valuation. Importantly, this thesis does not require a reinvigoration of the private equity fundraising of the company.

Change of Leadership/Deal on Share Structure

In May of last year, the Onex public shareholders approved a plan that should lay the groundwork to create shareholder value going forward. Gerry Schwartz, who founded and led the firm over decades since its beginning (and was inducted into the Canadian Business Hall of Fame in 2004!), was replaced by former Onex president Bobby Le Blanc. Shareholders also approved a plan which sunsets Schwartz’s control over the company via multiple voting shares over three years. This was actually a compromise down from five years after shareholders pushed back on a proposed five year sunset term. Management is now operating with a renewed sense of urgency to optimize the firm along the same time horizon as they realize that if it continues to trade at a large discount in 2026 when the new share structure kicks in, it could likely be a target for liquidation. Who knows how likely that would be but it does seemed to have spurred the company and CEO Le Blanc to take a hard look at capital allocation and the employee cost structure.

Valuation Building Block #1: Investing Capital of the Firm

At December 31st, the firm had investing capital of $142.61 CAD per fully diluted share of investing capital owned by the firm. This compares to a current stock price in the high $90s. I’d note that much of that is invested in USD based equity or debt so as the CAD has weakened this year, that can be something of a tailwind for current marks (though a few public investments are down YTD).

The investing capital as of 12/31/24 is broken down in the slide below: 

I would note a few things that can give one confidence in the appropriateness of the marks above:

1. At 12/31, about 17% of the firm’s capital was held in “cash or near-cash” instruments and another 11% was held in credit. If you assume these are money good type investments it implies an even larger discount on the private equity stakes (north of 40%). The firm also maintains a debt free balance sheet.

2. The company’s marks have historically been low compared to realizations. In the last 10 years, average premium to mark at sale has been 26% (actually slightly higher in 2023)

Valuation Building Block #2: FRE from Credit Business

Onex credit business currently has fee generating AUM of $22bn with a weighted avg management fee of around 51 bps which and run rate management fees of $115mm. About 80% of this is in structured products. By the end of the year, Onex has set targets for AUM in credit of $32bn of fee earnings AUM which should produce fee related earnings of $55mm in part due to high margins on incremental fees. This growth is predicated on:

1. Steady continued growth in CLOs (currently growth low double digits)

2. Higher AUM in opportunistic and liquid strategies

If Onex can hit these goals, the credit management business could be worth 15-20x FRE or $800mm-$1.1bn (translates to $14-20 per share in CAD)

Valuation Building Block #3: PE Business

I’m leaving this part as NA. The company overall is still running FRE losses in this area. Their intention is to get it to break even at which point it would pay the cost of managing a large business investing the firm’s capital. I think this is reasonably conservative but who knows. 

In addition to the company’s traditional large PE business, it has a middle markets oriented version called ONCAP which has done well and probably has a little more of an ability to raise capital in the current environment. As well, the company is out trying to market a new transportation oriented PE business which leverages some of its historical record in the area in a more targeted way. Overall the company does have a very good track record in PE though the recent large fund needs to show results. I think the key point, though, is that you don't need a big rebound in PE fundraising for this to work from here.

Capital Returns

The below table highlights the company’s impressive recent record of share repurchase in particular. Mgmt recognizes the opportunity and has aggressively tried to utilize its cash to take advantage of it.

Sum of the Parts

Putting it all together, if one looks out to 2026 the stock should have significant upside. For illustrative purposes, if they continue to compound their investing capital at historical rates (14-16% overall inclusive of PE stakes, credit and cash), year end 2025 firm investing capital would be $188 CAD per share. Adding in the potential value of the credit business gets you intrinsic value in excess of $200 CAD per share assuming no value for the PE business. This also assumes no accretion from continue share buybacks which are likely. The company actually today announced a renewal of its normal course issuer bid which would allow them to buy back 10% of the public float.

Disclaimer: This post is not a recommendation to buy or sell a security but rather intended for a discussion of key bull and bear debates, based on research of public information, including company websites and regulatory filings. This post does not constitute professional or investment advice. Past performance is not indicative of future results. Consult with a licensed professional if needed before making any investment decisions. Investing in public markets can be subject to severe short-term and long-term risks, including resulting in permanent loss of entire invested capital. This post represents my personal opinions and not those of any other entity. I and/or entities that I advise can change views and positioning, at any point in time for any reason, or lack thereof, without any notice. I and/or entities that I advise are not and will not be held liable for any outcomes, including any indirect or consequential damages. I could be absolutely wrong. This article has no guarantee to be accurate, complete, or current, and cannot be relied on as such. Please conduct your own due diligence.

Catalyst

Continued share repurchases

Company optimiztion ahead of multivoting share structure sunset in 2026