Q2 2020 Onex Corp Earnings Call
[music].
Welcome to our next second quarter 2020 conference call.
During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press star one when you touched <unk>.
If at any time during the conference you need to reach the operator. Please press Star then zero.
As a reminder, this conference is being recorded.
I'll now turn the conference overcome this Claire Watts, Oh, Bonnie director quite products at least that Onyx.
Please go ahead.
Thank you.
Good morning, everyone and thanks for joining us.
Broadcasting this call on our website.
With me today, our jury Schwartz, Chris got man and a number of managing directors.
Earlier. This morning, we issued our second quarter 2020 press release, I'm DNA and consolidated financial statements, which are available on the shareholder section of our website and have also been filed on SEDAR.
Our supplemental information package is also available on our website.
As a reminder, all references to dollar amounts on this call our in U.S. unless otherwise stated.
I'm, It's also point, everyone to or 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 Jerry to discuss our recent activity.
Thanks, Clare good morning, everybody.
It's been more than four months since our team began working from home.
Become accustomed to the rhythm virtual interaction.
But we're eager for a new normal in spite of these challenges we continue to make the most out of this.
Right quite unusual situation.
Overall, Onyx investing capital is up 11% this quarter with private equity capital up 16%.
Chris will provide more detail about the upswing in or private equity portfolio cope with 19 continues to affect many of our businesses.
Although fortunately someone or portfolio have benefited in its weak.
For example in June Clearvale.
We executed our third secondary sure sale.
Onyx partners sold approximately 21 million shares at 20 to 50 per share.
Onyx portion of that proceeds was 171 million.
As both a limited partner in old before and as a cool investor.
And last week.
Surveyed announced the transformational acquisition of C.P. global.
Purchase price of $6.8 billion.
<unk> global is our market leader and Pat renewals data and analytics.
Markets have reacted really favorably to this news with Clearbridge hears jumping.
From under $24 to almost $29.
As a reminder, clarity to our largest single private equity exposure.
Since quarter end the value of our clarity chairs is increased about 24%.
And now represents 18% of or private equity portfolio.
We're really pleased with how this investment has performed at our partnership with juries did clarity CEO.
And believing the opportunity for continued value creation.
We're also delayed who announced earlier this week another secondary sale or Sig comedy block shares.
Onyx partners sold approximately.
32 million shares at 15, 50 Swiss francs per share.
Onyx portion of the proceeds was 190 million doors.
As both a limited partner no before and.
A cool investor.
Congratulations to Nigel right and all our team worked on this.
We continue to look at industries and names, we know will for transactions that can generate p. like returns.
This quarter.
We made to preferred share investments in existing portfolio companies.
Emerald Exposition and running specialty group.
In both those investment satisfy these criteria.
At Emerald.
The cope with 19 dislocation.
It's actually what created an opportunity to invest in a business, we know well with solid collection of assets.
Position to grow through acquisition.
We believe this is an excellent investment for will be five.
With the potential for attractive risk adjusted returns.
The transaction was executed at a compelling valuation.
And his downside protection through a preferred share a structured and only modest leverage.
Onyx invested 72 million through will be five as part of the funds investment.
An additional $35 million.
It is expected to be invested from Onyx in Q3 Q3 2020.
As part of the funds Backstopping.
Emerald shareholder rights offering.
The total honest partners five investment is expected to be.
Approximately $390 million.
At rainy specialty group one of our specialty insurance investments. We've agreed we agreed to invest up to an additional $135 million.
In preferred shares.
In connection with that companies add on acquisition of all risks limited.
As a reminder, this particular investment until directly at Onyx Corp.
Like Emerald, we see the Ryan transaction as an attractive opportunity arising from this environment to help our businesses and their industry consolidation efforts.
Affirm has also been growing throughout this period in particular that Onyx credit.
We're making progress in building this platform into a well rounded credit manager with additional strategies in areas like distressed and structured credit.
We also issued three she loves this quarter two in the U.S. one in Europe.
This was a real achievement in a very challenging market.
In these issuances, we were able to both satisfy our desired return profile and tidy up where whos loans.
I, just especially like to thank Paul Travers and his team for their efforts in making this happen.
Last quarter, we announced the Jason you joined as co Ceos Linacs credit.
Since then we've hired a number of high impact professionals to enhance or existing strategies.
And to develop new ones.
Senior team members, who joined this quarter include.
Tony Jaber from Carlyle, who will be head of structured credit.
He'd be and sheds, Larry ill portfolio managers in opportunistic credit.
Como as head of high yield credit.
Oh, well experienced in their fields.
We warmly welcome these new additions and look forward to building or credit platform together.
This quarter Onyx credit completed the first close of its Onyx senior loan opportunity fund, which invest.
Primarily in North American and European first lien senior secured loans.
We also intend to lunch strategies in structured credit.
Opportunistic credit and high yield.
In the balance of this year.
Let me turn now to our wealth management platform Gluskin chef.
It's been just over a year since gluskin officially became a permanent part of the Onyx family.
As anticipated Onyx strategies have resonated with Klesken clients.
For example in the last six months gluskin assets under management in Onyx credit strategies increased 19% largely due to inflows.
We also continue relies on our broader ambition to offer gluskin planes.
Holistic wealth management solutions.
To lead strategic asset allocation and investment strategy.
We hired Matt Lehman as managing director.
Head of asset allocation.
Previously Matt was at credit Suisse in Zurich, where he was a member of their global investment Committee.
And responsible for leading the asset allocation process.
For the global banks 70 billion dollar pool discretionary assets.
So to wrap up let me just say that it's been a member for first half of the year.
I remain optimistic about a return to a new normal and to remedy to cope with 19.
But until then and there's always I have enormous confidence in our team.
To navigate through these challenges.
We've made meaningful strides and making onyx are up pretty companies in our credit portfolios.
More resilient and will continue in these efforts.
We remain fully committed to the alignment of management with shareholders.
The personal investment in everything we do.
We are side by side with you in this journey.
Thank you to all of our stakeholders employees and investors.
For your support.
Now, let me turn this call over to Chris.
Thanks, Jerry and good morning, everyone.
Phonics reported net earnings of $629 million or $6.43 per share in Q2 recovering a substantial portion of the loss reported in Q1.
Q2 segment earnings were 689 million or $7.02 per share.
Our segment results were driven by our investing segment, which contributed $657 million this quarter.
As was the case in Q1 on axes results. This quarter are for the most part a reflection of the significant and broad based movement, no underlying equity and credit markets.
Happily this quarter goes movements were upwards with the S&P 500 up 21% and the C. S leverage loan index, returning almost 10%.
However, we're also pleased with progress we've made it on X and the terrific job our investment teams and operating companies executives have done at our private equity portfolio companies.
So I'll try to highlight the anak specific factors that affected our results throughout my comments.
Let's start by looking at on axes PE portfolio.
Q2 included a net mark to market gains from private equity investing a $435 million.
As Jerry mentioned this gain represents a gross quarterly return of 16% reflecting value increases across much of the portfolio as the equity markets rallied strongly from the low was reached in mid March.
As was the case with the public markets in Q2, the value increases in our portfolio were broadly based.
As a reminder, onyx is PE portfolio is made up 37 separate businesses with no cross collateralization.
This slide detailed the allocation of the portfolio bike industry mistake segment at the end of Q2.
Each of these eight segments contributed positively to Onyx is returns in the quarter.
As our largest exposure, it's not surprising that business services was a big contributor with over $120 million of value increases mainly from clarity and powerschool.
And clever base performance post quarter end has given us a nice start to Q3.
Although not a large exposure for onyx at the moment industrials provided the biggest contribution in the quarter. Thanks, mainly to the significant rebounds in trading prices for both gel one and celestica.
Looking forward, there's little doubt the equity value of many businesses will be driven by the extent to which business models and consumer behavior continued to be affected by the pandemic.
Although industry sector is helpful. In thinking about these issues there are many different business models within the sector.
So as you recall from our Q1 call, we bucketed our investments into three categories of cobot exposure.
As I said then these buckets are far from scientific but have been helpful and discussing our exposure internally and in conversations with our limited partners.
Again, given the strong rebound in the equity in credit markets value increases were seeing almost across the board in our PE portfolio.
Even at the seven most exposed companies.
Efforts of our management teams to stabilize the businesses together with reduced risk premiums in the valuations resulted in a 7% value increase in Q2.
However, the impact of a pandemic and the associated dislocations in the economy is better is illustrated by looking at year to date changes in value across the portfolio.
For me there are two key takeaways from this chart.
First despite the very strong rebound we saw from the markets in Q2, our valuations continue to reflect a high level of uncertainty about the economy's path forward.
Second and perhaps more importantly, almost 60% of Onyx is p. exposure is in businesses that have performed well despite the pandemic.
Although we all hope for a relatively quick return to a more normal economy. The $2.1 billion at work in these investments provide onyx a meaningful hedge against continuing co bid related headwinds.
Our credit investments also had a big bounce back with $209 million of Mark to market gains for the quarter.
Given the structural leverage employed in the underlying strategies the almost 10% return from the C. S leverage loan index resulted in a 52% quarterly return from credit.
As I mentioned last quarter. In addition to our focus on overall credit quality, we continue to watch ourselves exposure to Triple C rated loans and the resulting impact on the interest diversion test.
If the interest diversion test is not Matt amounts that would otherwise be distributed to on X on the C.L. exactly our instead retained to purchase additional loans until the CLL was back on side the test.
The underlying metrics have improved nicely since the end of April and all our CLL was met their Q3 interest diversion test with only one left to be tested.
Our core oldest yellows are closest to the line.
However to put this exposure in context DC allows represented only about 4 million of our Q2 distribution.
Although the mark to market improvements in our credit investments were good news Jerry already mentioned, what I think with the most important aspect of our Q2 credit investing.
The pricing of three news close.
At the end of Q1, Onyx had 144 million of capital invested in three separate warehouse facilities with aggregate exposure to a 450 million dollar portfolio of underlying loans.
The new CLL has provided a net distributions onyx of $52 million and replaced short term warehouse financing with the long term and durable financing structure typical to our close.
These are great trades and meaningfully improved the risk adjusted return on almost a $100 million of Onyx capital going forward.
Overall, the allocation of on Axis capital has remained fairly stable this year with cash and your cash now standing at nearly $2 billion or 32% apart and abbey.
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 cobot and more importantly remain on the hunt for more.
At credit we've been able to continue to build our COO business and allocate $100 million of capital to Opportunistically take advantage of dislocations in the market.
And our balance sheet positions us to support Stourton, Jason as they build up the credit platform and what we expect to be a busy 12 months across several new strategies.
Last but not least our strong balance sheet has also allowed us to be active repurchasing our shares.
Although I believe there's meaningful value associated with our asset in wealth management platforms.
Even where our stock has been trading I only need to look at Onyx is investing capital or hard any b to get comfortable with buying back our stock.
At quarter end marks Onyx is investing capital per share was Canadian 80 463.
However, I 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 Canadian $43 per share.
Assuming nobody will argue about the value of these assets.
When we can buyback our stock at around Canadian 58, where effectively buying in the rest of our investing assets about 18 $42 per share of private PE investments and credit investments I.
I had an implied discount of about 60%.
So as you can imagine I'm pretty happy Onyx is purchased almost four and a half million shares through the end of July.
At an average cost of $57.94 Canadian per share. These repurchases effectively treated about 120 million kadien dollars of math for our continuing shareholders.
Before turning the call over to Q, Hey, I'll spend a few minutes on the asset in wealth management segment.
We generated earnings of 32 million or 34 cents per share in Q2.
The year over year increase in net earnings was driven by PE and in particular, an increase in carried interest on a mark to market basis to $23 million.
This was partially offset by a reduction in PE management fees, which trended down as realizations reduced the fee base in our fully invested funds.
The credit manager contributed a net loss of $1 million in Q2, reflecting upfront investments to build out the team and position the platform to meaningfully grow strategies outside of see lows in senior loans.
We are particularly focused on opportunistic in special situations structured credit and high yield for near term growth.
As we raise fee paying capital across these new stuck strategies, we expect onyx credits profit margin trend towards historical levels.
On an LTM basis year over year, P. management fees were up 8 million with the inclusion of a full year from opening five.
Partially offset by decreases associated with realizations and fully invested funds.
Whoever the most significant driver LTM results with 68 million dollar net reversal of carried interest which drove the P.E. managers net contribution to breakeven.
However, with a crude carried interest of only $21 million at June thirtyth, but over nine and a half billion of private equity a U.M. subject to carry we expect carried interest to contribute meaningfully to improve results going forward.
Looking at credit the recent Q2 initiatives I discussed on the previous slide also contributed to a reduction in profitability on an LTM basis.
And finally wealth management 43 million dollar contribution reflects the first 12 month period. Following the gluskin acquisition in June of last year.
Looking forward Onyx is run rate annual management fees or $296 million.
184 million from private equity 59 million from gluskin public equity and debt strategies.
And 53 million from Onyx credit.
We'd now be happy to take questions.
As a reminder to ask the question you will need to press star one on your telephone.
Withdraw your question press the pound cake again to ask a question press star one on your Touchtone telephone.
Please standby we've compiled acuity roster.
[noise] [noise]. My first question comes from a lot of Mick pre I've see RBC capital markets. Your question. Please.
Okay. Thanks, good morning.
I was wondering when you look out across the existing private equity portfolio.
I have your views evolves to any degree on the amount of additional liquidity or somebody portfolio companies may require over the next 12 months like I think last quarter you'd indicated it wasn't to substantial maybe something on the order of $100 million, but just wondering if there's any update on that.
Yes, it's Bobby <unk> the outlook for liquidity continues to be quite good across the PE portfolio. The one business Pearl Pea that we made an equity injection to as part of a covenant really packages part deemed but that was a minor relatively minor injection and I don't see any liquidity issues.
The portfolio for the next 12 months.
Okay. Okay. That's helpful.
And then maybe a question for Chris I'm, just going back to the topic of buybacks I have I did pick up that you've been very active this year I'm. Just wondering if you could speak to your remaining capacity on the entity and how much capital you make comfortable committing to buybacks. Just you know given that you have 30% of investing capital allocated to cash.
Yeah, we don't have any definitive a limit other than obviously the the actual limit on <unk> normal course issuer bid Nick in mind.
We're going to continue to look at.
Our liquidity Onyx, Corp., which remains very strong.
And compared the opportunity under the normal course issuer bid to the opportunities, we see I'm coming down the pipe to put money to work in private equity and credit and elsewhere. So I think we're going to stay.
Open minded an opportunistic and don't have any sort of set.
Targets or or limits.
Okay fair enough.
And then on one of the pages the presentation, Nate where are you categorize the private equity investments into the three buckets based on relative exposure to coordinate team and you also had the year to date changes and values.
So for that bucket with low to positive exposure I think the investments had actually been marked up 21% on a year to date basis, even though you know when I look at public equity valuations the roughly flat on the same timeframe. So what are the standouts in that group that are really driving growth in the market matching clarity is included there but are there any other color.
Clearvale is included there and it's obviously a standout including as Jerry mentioned, some some significant uptick since June thirtyth. The other two that I'd, probably point to are kind of comparable exposures, one being our as GE and other being calling backs in the specialty insurance market.
Where a again I think both those businesses are well positioned.
To capitalize on some real positive trends.
Within that industry.
And then last I, probably point to the Powerschool.
You know, whose business model, including the add on acquisition of squalid GE a last year you know its positioning it to <unk> <unk> to take advantage of some aspects of the pandemic as it relates to a particular in class I capabilities and services that school boards require I don't know.
A body, whether you'd have anything to add to any of those.
No I think those are the for that or that are really well positioned at the moment, so I'm going to add a little bit too sick comedy block has moved up nicely.
The big decision.
Yeah, the industrials rally pretty well this quarter was for children and Sig.
Okay got it that's great color, thanks very much.
Thank you. Our next question comes on line of Jeff Clogging of RBC capital markets. Your question. Please.
Hi, good morning.
My first question is got a couple of parts. So just kind of heading into next comment on a question on the buybacks. That's given onyx shares are still trading in a big discounts and Navy.
You talked about how you're buying back stock, but just wondering on what you've done. So far have you been generally kind of mixing out on the DG limits that choose that you're allowed to do and also in general how you're thinking about <unk>.
Returns putting.
Capital to work or cash to work.
Versus the share buybacks.
And then does substantial issuer bid make any sense and also how that impacts your liquidity.
Yeah.
So if they're chef, so I think and I'll, probably get some some help from others when I'm done here, but in terms of the stock buyback itself, we have and are capable generally of capping out on our daily limit.
Well when were when we're in the market and want to be in the market as you know I'm in the first I'm going to say I'm trying to remember whether carried on through May.
But but during part of the first half of the year. The daily limit was actually twice its regular daily limit as it was also some relief I provided by regulators, but that's back down to its normal weather. So that's.
That we want to be buying stock and the market. It's typically you know quite straightforward to get to the daily limit.
We have had a few blocks, but have moved but up but not all that many that allowed us to exceed our daily limit from time to time and we're always on the look out for those and well get a lot you write downs opportunistically as they are as they arise I think you know substantial issue.
Your bid we you know, we obviously thought about back from time to time I as a management team I think that we've generally been up the view that in our business, where there are opportunities to invest that arise sometimes on relatively short notice.
That that you know taking ourselves out of the market for a long period of time, while the substantial issuer bid is out there and and you know tying up capital. If you will allow for a bid that may not actually be filled.
Which could give rise to missing other opportunities hasn't felt like the right thing to do up until now we felt that being nimble in the market through the normal course issuer bid has been the right the right path forward.
But as I said, we do think about that from time to time, it's an obvious question, but but that's sort of where things have shaken out here for it.
Okay and then.
Let's move to.
The comments from last quarter anything kind of change from a deal pipeline any color around that and then also did you if theres anything could you seem to portfolio that that.
Make sense is monetization candidate.
So in terms of new business activity. It was slow for the last couple of months, but in the last few weeks.
The banks have been been telling me that to expect processes in Q4, I don't know how much that's being driven by uncertainty around the U.S. selections and.
And related issues that might come from that but we see it beginning to percolate again again, nothing near normal but better.
In terms of Monetizations, we really don't like to talk about the things that we're contemplating selling but again, we we constantly look at you know hold versus sell across our portfolio and we'll continue to do that consistently.
Okay and just my last question, Chris I teach 25 of the supplement it kind of shows the acid wealth management earnings and I believe that just the one that shows including the just kind of theoretical fees that would be charged onyx or are the fees that would be allocated from accounting perspective and is it teach 27 of the supplement again.
Would be tend to be apples to apples showing what the earnings would look like without those she said are allocated debt on excess capital.
Yes, that's right, Jeff so both on a quarter Lee basis than a year debate date basis, a little later in the deck. We provided a supplementary schedule just a bridge segment earnings to what segment earnings would be if we did not include fees on on axis private equity capital that's correct.
Thank you for that disclosure.
Thank you again, ladies and gentlemen to ask a question. Please press star one and you touched on telephone again, that's star one on your Touchtone telephone to ask a question.
Our next question.
So on the line of Scott Chan of Canaccord Genuity. Your line is open.
Hi, Good morning, everyone. During your opening remarks you.
I have talked but to preferred share investments.
These these type of investments obviously opportunistic in this market plays the do they had the same potential total return profile as say a typical.
Private investment that you adopt that you would look at.
We always look at the.
Risk.
As compared to the rate of return opportunity and I would say that both of those with significant.
The structural preference to our new investment.
I think the risk return profile in them.
Is it.
It's actually even better than the normal the type of returns that were looking for.
Yeah, I think I think I I.
Feel pretty confident that that risk retention ratio.
It's really really very favorable.
Absolute return basis.
You know if we see any kind of the norm return to normalcy within the next two years on a on Emerald than I think it has the potential of even even better on an absolute return.
Our or as cheese Ryan specialty.
It is already.
So highly successful for us.
The we're chasing a higher standard.
Okay, Thanks and.
In terms of that groups that you talked about I guess doing well I'm just interested in update and Klondex I don't think we've.
Kind of discussed that since you made that is your first investment it'll be five.
Yes, so true convex is doing quite well we've attracted all the human capital that we that we are seeking to.
I'm to higher within the first year. The original investment thesis was we thought the property casualty industry generally had been.
Under pricing risk for years, then there would be adverse reserve development and we began to see that honestly quite yeah.
Well pre coated and cold it has just accelerated that thesis bye.
Through price increases almost across the board and the PMC industries I would say convex is even better positioned than.
Then when we made the investment we're going to probably accelerate our growth plan I'm just given how good the pricing is relative to risk and the fact that Stephen in ball have no legacy liabilities to deal with like the rest of the industries and state of the our systems I think from a from an operational efficiency point of view, they're going to have an advantage.
As well if we as long as we execute 'em, we didn't do really well there even better than our original investment thesis.
And I I, just add to that the Bobby's Bobby mentioned, it, but but the it needs a bit it should it deserves a bit of emphasis.
We've gone from the standing start of three or four employees when it went really well.
First established.
Context to now.
Full team of what Bobby 120, or 140 people underwriters Yep Yep Cross sold across all disciplines, Yes, we're really shouldnt really excited about it.
Okay, and I'm not talking about on cap for too much but I noticed the net return is.
As is modest.
Is there anything in that portfolio that kind of sticks out that has been impacting the on the performance of that mid cap private equity fund.
No.
Again that they have to companies that sort of we're you know consumer facing pure Canadian gaming and auto source like part deem it had to work with their lenders to to make sure. They were okay and some covenant issues nothing major there.
But those would be the too I would highlight in terms of being sort of in the direct line as she 19 like and I assume or am I never was.
Okay, and just last question lots of senior hires in the last several months.
Do you anticipate anymore are there any kinda holes in any or segments that that you look to I guess upgrade or expand.
I'm sorry, I missed the question could you repeat the beginning of the question Yeah. Bobby I was just noticing that youve.
Hired several senior keep people.
Within I guess, specifically credit and gluskin.
I'm just wondering if he buys anticipate any additional hires to to expand any.
The other segments at all.
I'm, sorry, you must be to credit and Flushing.
Sure.
I think we're probably most of the wage through the most senior hires we probably still have a little bit of growth related hiring.
Ah Ah gluskin.
And we will probably also add a little more.
Ah seat on the street, two or distribution group.
But in terms of senior portfolio management leadership.
I think we're pretty close to done.
And the piece I will continue to recruit the younger talented organization to little bit tougher in this environment than to do those interviews that we'll we'll do them remotely and we're always on to look for for senior talent at both on cap and Ob, but nothing that the plant.
Okay. Thanks for your time.
Thank you.
Thank you at this time I like to turn the call back over to Jerry shorts for closing remarks, Sir.
Thank you thanks, everybody for participating today or are there. It's it's a it's always nice that.
See some glimmers of hope coming back and that Cove. It is isn't totally.
Controlling all of our thinking you know all of our hover at worst nightmare.
So thank you for a barrier.
Your patience. Thank you for your continued support that's really it. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
[noise].
[music].
[noise].
[music].