Q4 2020 Onex Corp Earnings Call
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Welcome to Onyx fourth quarter and full year 2020 conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session with prequalified analysts.
At that time, if you have a question. Please press star one on your telephone keypad if at any time during the conference you need to reach an operator. Please press Star then zero as a reminder, this conference is being recorded I will now turn the conference over to Jill <unk>, managing director of shareholder Relations and communication Economics. Please go ahead.
<unk>.
Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our web site hosting the call today are Gerry Schwartz, our founder and CEO, Bobby Le plaque on X as President and head of on X partners, and Chris Galvin, Our Chief Financial Officer.
Earlier. This morning, we issued our fourth quarter and full year 2020 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 per dollar amounts on this call are in U S. Unless otherwise stated I must also point everyone to our webcast presentation per our usual disclaimer and cautionary factors relating to any forward looking statements contained in today's presentation and remarks I want to let everyone know that on X is planning.
Hosting an investor day. This fall will provide more information in the coming months with that I'll turn the call over to Jerry.
Thank you Jill and good morning, everybody.
Year end is always a natural time for reflection.
As I think back to this time last year.
It would've been hard to imagine the events that followed it.
In fact, I simply couldn't book.
Even with those challenging conditions, the one country per onyx has been our discipline.
These are long term investors, we've endured cycles and disruptions.
By remaining focused on our core principles.
Growth meaningful relationships.
Dive deep into the industries that we cover.
And build a diversified portfolio.
A year like 2020 highlighted the importance of maintaining that discipline.
Bobby and Chris will provide more details on our results, but first I'll comment on highlights for the year 2020 was indeed, an active year for on X with each of our platforms executing on value creation strategies, and I must say long term value creation strategies.
In private equity.
We had a successful year of realizations and deployment and.
And overall from performance is tracking quite well.
Our portfolio companies have for the most part weather the pandemic.
Thanks to strong proactive management.
Are you seeing benefits even in this new environment.
Those more adversely affected often businesses dealing with the direct impact of government imposed lockdowns.
We continue to have strong value propositions.
Will support their success as the recovery accelerates.
Generating gross private equity returns of 24%.
A year like 2020.
There's plenty of evidence of our ability to create value in all environments.
Throughout last year on the credit and I will now talk a bit about on X credit continued to build out its platform and product offering.
Positioning it for future growth.
Credit attracted strong talent to its team and.
It has had early success with new strategies.
With the acquisition of Falcon investment advisors, we now have capabilities and a proven track record across our entire credit platform.
As well as comprehensive integrated go to market strategy.
I am confident in the credit teams ability to deliver positive returns on the investments we have made and will continue to make this year.
At Gluskin Sheff.
On X products continued to drive interest from their clients.
With close to $800 million.
Allocated to Onyx credit and private equity strategies at year end.
The benefit of being able to offer a more diverse product range.
It was a core assumption behind our acquisition.
And we've been pleased with the response.
And on X itself.
Our people have always been the driving factor of our success.
About 2020, we added to our team and strategic and growth areas strained.
Strengthening the breadth of our experience and the depth of our talent.
We've worked hard and delivered a year of results and achievements that we can all be proud of.
Your appointment of Bobby.
To president of on X was also a major milestone in 2020.
Bobby has the leadership financial and operational acumen to continue to drive our organization forward on.
I'm incredibly pleased with what he's accomplished so far.
Finally, I would like to thank you our shareholders for your continued support.
Especially in a difficult year.
One of Onyx as other funding principles, which is corridor culture.
Is the alignment that our team.
Has with you.
We continue to see incredible value in on X as an investment.
A great potential in the business as we've built to drive long term sustainable earnings.
Creating value for all of us for years to come.
With that let me turn it over to Bobby.
Thank you Jerry and good morning, everyone.
Q4 was another strong quarter for on X contributing to an overall good year.
We reported net earnings per share of $6 61.
For Q4, and $7 63 for the year.
Total segment net earnings per share were $7.72 per the quarter up 43% from Q3 and.
And $8.95 per the year coupled.
Couple of 11%.
We ended the year on a solid position.
With investing capital per share up 18%, our strongest year of invested capital growth since 2013.
These results speak to the diversification and resiliency of our overall portfolio and our ability to successfully navigate challenging market conditions.
As global economies continue toward a more robust recovery, we see opportunities across our investment platforms.
We had a productive year on private equity with our funds realizing approximately $2 7 billion and deploying approximately $2 5 billion.
With deployment, we were able to drive opportunities through deep industry knowledge and long term relationships.
On the Onyx partners.
<unk> five is slightly ahead of pace at more than 50 per cent invested including our recently announced investment in Weld North education.
Well north as the market leader in digital first curriculum for K 12 schools.
The increasing use of technology in these schools.
Core theme for our software and business services vertical.
We followed Jonathan Grayer Weld North CEO in the company for a number of years.
With the benefit of our experience with power school.
We have a differentiated lens, which allowed us to thoroughly evaluate the opportunity as a value added an investor.
Gross private equity returns for on X were 14% in the quarter and 24 per cent for the year.
Importantly, before ended the quarter with a net IRR of 8%.
Putting it in a carry position for the first time.
<unk> also triggered carry this quarter, although obviously a future carry position will be impacted by ongoing capital deployment and investment performance.
Based on the current March RPE platforms, now have accrued carried interest attributable to onyx of $87 million.
An increase of $54 million in the quarter.
Chris will provide more information, particularly on <unk> for carry in his remarks.
Incorporating more direct operational expertise within our private equity team has been an important strategic priority.
Earlier this year, we announced the appointment of Wes Pringle as the head of portfolio operations for on X partners.
West brings significant operating experience will play an important role in both the due diligence of new investments and execution of operational improvement opportunities.
West will also join the Onyx partners investment Committee and he and I will work closely together and further developing our operations capabilities.
Before moving to credit.
I wanted to touch briefly on private equity fundraising.
As a reminder, raising successor funds can begin once our current funds are 75% invested.
As I mentioned earlier <unk> is now at just over 50% invested.
<unk> four is approximately 70% of investing.
Therefore subject to pace of deployment, we would expect to be in the market with our next on cap Fund later this year.
And on X partners by the end of 2022.
On a credit continued its momentum in Q4.
Increasing assets under management, and deploying new strategy to drive future growth.
Fee generating AUM was more than $15 billion at year end, including our acquisition of Falcon.
Excluding falcon fee generating AUM grew 10% for the year.
We issued four new Clo's and made good progress with other strategies across the platform.
We are currently in the market with two credit strategies.
And we would expect to launch two more in the second half of the year.
With the investments we made in 2020, we now have the capabilities in each of liquid opportunistic in private credit investing.
The platform is now well positioned to drive future growth and management fees and carry.
Recently, we've been communicating to shareholders that we intended to provide additional information on performance expectations throughout 2021 and beyond.
For on X credit.
We expect fee generating assets under management to grow on the range of 25% to 30% this year, leaving.
Moving to an increase in 2021 exit run rate management fees of approximately 10%.
And credit unlike private equity.
Assets only generate fees upon investment.
So fees will increase as more capital is deployed.
As we look ahead to 2022.
We expect further AUM growth for on X credit of approximately 15% to 20%.
As you heard from us on the Q3 call.
Given the upfront investment we made in 2020 to build out the on X credit team. We continue to expect margins to be muted in the short term.
With the level of AUM growth, we're now projecting.
We anticipate a return to a more normalized 40% margin for the business.
Within the next three years.
With the majority of the new Num also providing a carried interest component.
There'll be an additional upside the onyx and overall economic return.
We see strong potential what the Onyx credit platform and we are confident in the team's ability to deliver enhanced returns going forward.
Within wealth management as Jerry said, we continue to see more gluskin sheff clients investing in on X private equity and credit products.
Within the quarter.
We saw approximately $190 million on gluskin sheff client capital allocated to on exit strategies.
As we look ahead, we expect to see further integration within our investment teams.
Particularly where we identify and enhanced collaboration and information sharing opportunities.
Overall, we feel positive about our ability to drive value across all of our platforms.
With our strong balance sheet, we continue to have the flexibility to meet our private equity commitments, while also investing in other areas to grow future earnings.
Finally to Echo Jerry's comments.
I would like to take this opportunity to thank all of our shareholders for their continued support.
I would also like to thank our employees, who have managed through a challenging year.
The commitment and entrepreneurial drive that is core to our success.
With that I'll pass it over to Chris per more on the financials.
Thanks, Bobby and good morning, everyone.
On X is resulting Q4 continued to reflect the strength and diversification of our investment.
The ability of our portfolio companies and their management team to navigate the pandemic.
And the underlying improvement in the financial markets with the S&P 500 up over 12% and the CF leveraged loan index, returning nearly 4% in the quarter.
Let's start by looking more closely at on X and PE portfolio.
Q4 included a net mark to market gain from private equity of $483 million, bringing the total contribution from private equity to $731 million per the year.
This performance now reflects consecutive quarters with gross quarterly returns of 14% and as you heard from Jerry and Bobby brings us to our full year gross return of 24% from private equity.
This next slide details the allocation of the 38 separate businesses that comprise on X <unk> PE portfolio by industry segment.
We experienced double digit returns across pretty much all of our industry segments in the quarter.
This strong performance reflects the continued recovery in the financial markets and it was led by our events on leisure and aerospace and defense investments.
Two of the industries that are most directly impacted by Covid.
Yeah.
Increases in valuations can largely be attributed to the market and our businesses, having better visibility on a return to more normal operations. Following the rollout of vaccines and some lifting of government restrictions.
However, it's worth noting that our valuations generally anticipate a bumpy returned to normal that will stretch beyond 2021.
When we pivot and break down our PE portfolio by Covid exposure, we see a strong recovery of the directly exposed businesses.
The seven businesses were up 40% in the quarter and also had the largest dollar contribution to investing earnings.
As a result, the group recovered most of the ground at loss during the first half of 2020, finishing down just 3% in the year.
On a similar note the businesses that we've identified is facing demand and our supply headwinds in the current environment also saw double digit improvement in the fourth quarter, having fully recovered the value lost earlier in the year and ending the year up 2%.
Finally, and equally important is the nearly 60% of on X as pay exposure in businesses, where we believe the pandemic has either a low or positive impact.
This group continued to contribute value up 7% in Q4, and finishing the year up over 50%.
These businesses should continue to provide on X a hedge against Covid related headwinds in the near term.
Our credit investments had meaningful mark to market gains in the quarter up 21%, taking us into positive territory for the year with a 7% return.
The increase was primarily driven by a strengthening of the underlying leverage loan market with the index returning two 8% in Q4.
As we discussed last quarter.
Covid related impacts on the underlying loans means we no longer expect our pre COVID-19 CLO investments to reach the low double digit IRR as we targeted.
Rather the mid to high single digit returns we signaled in Q3.
However, we do expect the cielo has to provide a meaningful positive return overall.
Attractive returns from their current marks.
Looking back on the year, we deployed $57 million in four new CLO, which we expect will provide strong risk adjusted returns as.
As well as a predictable stream of management fees on $1 5 billion of associated AUM over the coming years.
Overall shareholder capital per share was up over $11 from December 2019.
Driven by an 18% increase in investing capital per share.
Which as Bobby mentioned is our strongest year since 2013 in that regard.
In absolute terms shareholder capital was up only $226 million or 3%, reflecting $444 million used to repurchase $9 8 million on X shares nearly 10% of the Sps outstanding at the end of 2019.
We were able to purchase these shares at an attractive discount throughout the year.
As I showed you in previous quarters that discount with substantial, especially when giving full value to our cash and publicly traded investments on.
On that basis, our repurchases consistent from the implied a discount to the private investments north of 50%.
For the full year on X as realizations totaled just over $807 million from private equity primarily from secondary sales of <unk> and <unk>.
And our credit investments returned over $100 million, including $76 million of regular quarterly CLO distributions.
On the investing front on X has put nearly $670 million to work in p/e since the beginning of the pandemic about half of which was deployed in Q4.
Including $136 million for an incremental investment in convex.
And $200 million for one digital.
With the announcement of Weld north on the first of this month, our investment pace has continued into 2021.
On X expects to invest $275 million in weld, North which includes the co investment of about $100 million.
Next I'll spend a few minutes on the asset and wealth management segment.
<unk> net earnings of $99 million or $1 seven per share in Q4, and $87 million or <unk> 90 per share for the year.
The year over year increases in net earnings both in the fourth quarter and the full year were driven by P/e.
In particular, a marked improvement in carried interest as we began to accrue carry.
<unk> four and <unk> five.
I'll go into more detail on the op for carry on the next slide but needless to say we're excited that the performance we've seen in the fund over the last couple of years as investors is now contributing to the asset managers earnings.
I'll also reiterate bodies earlier comment with.
With <unk> being about 50% invested and much of that having been invested over the past year or so we expect carried interest from OPEC five to fluctuate while the fund matures.
The improvement from carried interest was partially offset by a reduction in pay management fees, which trended down as realizations reduced the fee basis and are fully invested.
The credit manager contributed $3 million in Q4, continuing to reflect the upfront investments we've made to build out the team and positioning the platform to meaningfully grow outside of CLO and senior loans.
As you heard from Bobby we expect margins to improve in the coming years as these investments bear fruit.
In wealth management.
The net contribution decreased by $5 million year over year.
In addition to investments we've made earnings were impacted by lower AUM and lower management fees as we aligned rates to be more competitive.
Lastly, before turning the call over to Q&A I wanted to drill down a bit on the op for Kerry.
Let's start with the fundamental.
For the GP to begin accruing carry on to fund the <unk> need to be earning at least the preferred return which for all our p/e.
Is a cumulative 8% net IRR. This is referred to as the hurdle rate.
With a net IRR that broke through the 8% threshold in Q4, we are just beginning to accrue carry on <unk> four.
If the value of the remaining portfolio falls, where it doesn't grow sufficiently to maintain accumulative net IRR of 8% the.
On the $11 million of carry accrued at December 31 would reverse.
On the other hand, beginning to accrue carry also means that there is a lot of upside as we build on that 8% net.
As a result of the catch up mechanism in the funds.
80% of the value, we generate for our Lps above the hurdle rate.
We'll accrue with free until the GP has been allocated 20% of the Lp's cumulative net gains.
Since the on X is entitled to 40% of the carry this means that 32.
Every incremental dollar of value on LP capital and <unk> four will accrue to on X in the near term.
The next slide illustrates this point.
There are $2 $7 billion of OPEC for LP capital on the ground at December 31.
With $11 million of carry accrued to on X Corporation.
In order to maintain our current carry position, we need to generate about $220 million of value on the capital in 2021, a return of 8% on that $2 7 billion.
But as I said earlier for every dollar of value above that threshold.
32, a carry accrues to on X, while we're in the catch up zone.
So if instead of 8% or four returns, 15% to 20% on the LP capital in 2021 on.
On X Corporation would accrue additional carry of about $55 million to $100 million in the year.
This of course is only an illustration. However, we think it's important to remember the potential for outsized increases in carry as we move through the catch up <unk> waterfall we.
We hope that <unk> continues to perform in 2021 and generate additional value for our Lps and carry for on X shareholders.
So with that now I'll be happy to take questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Geoff Kwan from RBC capital markets. Your question. Please.
Hi, good morning.
First question was just how you would talk about the deal pipeline state, but also too on the monetization side.
Do you think about potential opportunities in your portfolio.
The market environment at this day.
Hey, Jeff, It's Bobby Hope Youre, well the pipeline I would say is still from a volume point of view.
Weaker than normal, but the quality of what we're looking at is pretty good.
I think some of that is.
Just the market I think some of it's also when we when we changed our approach to go to market for free.
For <unk>.
We've become much more dramatic and pointed in terms of the opportunities that we're looking at.
But the ones. We are looking at now are quite good in.
No.
Good good actions hopefully we'll have some good action on building.
Okay, and then in terms of amount in terms of on it.
Yeah in terms of it again, we don't talk specifically about individual monetization, but obviously, we're always looking at our portfolio and asking ourselves what should be monetized on why shouldnt be we have <unk>.
Normal wholesale discussions on each portfolio company throughout the year.
And obviously, there's been different there are different ways, we could look at or you think some of our portfolio, including the recent uptick in specs.
Which we've noticed and we get a lot of inbounds on those from a monetization point of view.
Okay and then.
I know kind of when you look at the NAV.
Well diversified there is no obvious concentration risks.
When you think about your larger investments and if we assume that gradual improvement in the economic environment over the next year.
On.
What would you say would be let's say the three investments that you think could be relative outperformers in this context.
Well, it's hard to say again, you have to ask yourself is it risk adjusted returns versus absolute returns and things like that but certainly.
Like our contracts for example, the backdrop of the insurance market and reserve strengthening that we're we're seeing in the pricing environment. There there certainly could be upside there.
Over over the intermediate term power school.
And more recently weld North I think just in terms of the K through 12 education on the stimulus dollars being deployed against that platform.
It makes us very excited about the longer term prospects and they are both reasonably sized big checks, but.
We're kind of across the whole portfolio. Those are just a couple of highlights of things that could go well, but every dollar matters.
We're focused on the whole portfolio.
Okay. Thank you.
Thank you. Our next question comes from the line of Scott Chan from Canaccord Genuity. Your question. Please.
Hi, Good morning, maybe just a follow up on Jeff's question.
On 'twenty.
I think the deployment and the realization.
We're on it.
Oh, yes.
Yeah.
Hi.
Scott.
Just realized it would be larger than the appointment opportunity.
It's so hard to predict like it really is it depends on what comes through the pipeline, what's actionable what what the demand looks like for some of our portfolios and our value creation plans.
I really would be reluctant to try to predict that it kind of falls out. It is what it is sometimes the market is better for.
For dispositions, sometimes its better for acquisition in the case of last year, it was sort of equal, but it's very hard to predict.
Okay Fair enough and then.
So.
You talked about <unk> and I think you mentioned that O T. Five as an accrued carry position. So does that imply right now is that correct.
That's fine.
On the hurdle rate on a net IRR basis.
Yeah, Hey, it's Chris Hi, Scott on Thats.
That's correct <unk> five is above the hurdle rate.
And and therefore accruing carry on a mark to market basis.
Just to reiterate what I said in my in my scripted comments.
It's only half invested.
And so as we put additional capital to work.
That new capital can have a pretty significant impact on the cumulative IRR on both positive or negative rate and and so I think you should expect is that there could be some some real fluctuation.
On a quarter to quarter until until the investments are a little bit more matured.
And you don't expect the IRR to be fluctuating quite so much.
And just lastly, correct.
Now on the 6% investing.
When do you expect.
Start reporting the fund performance on a quarterly basis, and then just sorry.
Clarification.
Or does it not to be 70% or 75% index.
I just missed that hopefully yourself on mute.
On.
Yeah. So I'll answer the second question first 75% invested a reserved.
Cutoff in terms of being able to actually close on a new fund.
In terms of the IRR, we are disclosing.
The performance of <unk> five in the MD&A and in our report Scott.
I don't have that page number right at my fingertips, but it is it is in the report this quarter.
Oh, Okay, Okay, I'll take a look thanks a lot.
Yeah.
Thank you once again, if you have a question at this time. Please press Star then one.
And this does conclude the question and answer session of today's program I'd like to hand, the program back to Gerry Schwartz for any further remarks.
Thanks, everyone for participating on the calls.
We really appreciate your support and we certainly wish you and your families continued good health.
Please feel free to go on sale.
Jill or Emilie if you have any questions. We look forward to speaking with you again next quarter.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
With that.
Okay.
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Yeah.
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