Q2 2021 Onex Corp Earnings Call

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Okay.

Welcome to <unk> second quarter, 2021 conference call and webcast.

During the presentation, all participants will be in listen only mode.

Afterwards, we will conduct a question answer session with prequalified analysts.

At that time, if you have a question. Please press star 1 on your telephone keypad.

And so at any time during the conference you need to reach the operator. Please press Star then zero.

As a reminder, this conference is being reported.

I will now turn the conference over to Jill harmonic managing director shareholder Relations and communications at Onyx. Please go ahead.

Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website hosting the call today are Gerry Schwartz, our founder and CEO, Bobby Leblanc Onyx as President and head of Onyx partners and Chris Galvin, Our Chief Financial Officer earlier. This morning, we issued our second quarter 2021 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.

Supplemental information package is also available on our website.

As a reminder, all references to dollar amounts on this caller and U S. Unless otherwise stated I must also point everyone to our 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.

Thanks Jill.

Good morning, everyone and thanks for joining us today.

Q2 was another good quarter for robotics, all of our businesses continued to execute well.

And investing capital per share.

Sometimes referred to are commonly referred to as net asset value per share or <unk> per share and.

Ended the quarter at U S $80 from 32 cents.

Private equity and a particularly active quarter with both deployments and realizations extending right into Q3.

And our next credit the team made good progress on our objective.

To make our CLO business less capital intensive.

Gluskin Sheff delivered a quarter with positive net inflows and <unk>.

Client capital and our private strategies continuing to increase.

Bobby and Chris will provide more detail on this.

Across our businesses and our focus on stronger integration continues to enhance results through our 1 on X approach.

Our team is working together to identify and to leverage opportunities for the benefit of all of our stakeholders, including of course shareholders.

At our September 30 Investor day.

We will lay out a roadmap for how long it will evolve and grow and the coming years.

You will hear detailed presentations from each of our business leaders.

We play and also to highlight our expanding ESG program and we look forward to introducing more of our senior leaders.

Our Investor day will be a good opportunity to profile the progress we've made and the year since we announced our management changes and the appointment of Bobby as President.

I'm proud of the work that our team has done to advance our businesses and our financial performance.

We have significant momentum across onyx and confident in our ability to continue to deliver strong.

Long term value.

Our goal is to ensure that the value and potential we see is also appropriately reflected in.

And the value we provide to you our shareholders.

As always we appreciate your continued support thank you for that.

Now I'll turn it over to Bobby for more on the quarter.

Thank you Jerry and good morning, everyone.

Earlier today, we reported segment net earnings per share for Q2, and $3 and <unk>.

And net earnings per share of $1.95.

As Jerry said, it was a quarter, where all of our businesses made good progress on key initiatives.

Investing capital per share grew 3% and the quarter.

And is now up 9% year to date and.

33% over the last 12 months.

Gross private equity returns for Onyx were 4% and the quarter.

13% year to date and 47% for the last 12 months.

Year to date.

Alex Partners, 4 and 5 have returned 15% and 12% respectively and our.

Non caf funds returned to collective 17%.

All of our industry verticals delivered positive returns over the last 12 months.

We were active across our private equity portfolios and Q2.

And into Q3.

Well, then Onyx partners, we completed secondary offerings for both <unk> and <unk>.

Okay.

In July.

Power School and Ryan Specialty group, both completed their initial public offerings on the New York Stock Exchange.

And the case of power school.

All of the proceeds were used to pay down debt.

With our S G.

Realized approximately $490 million as a result, delivering a realized gross <unk> of 1.8 times to date.

RFG continues to be a substantial investment on our balance sheet.

Turning to capital deployment.

<unk> partners 5 completed a seventh investment with the acquisition of Newport Health.

Leading U S provider and mental health services for teens and young adults.

Health care is 1 of our core investment verticals and we have a long track record of successfully investing and the sector, including behavioral health.

Our Uncap team was also active completing and investment and comer industries and use.

And based designer and manufacturer of industrial waste and recycling processing systems.

And total year to date, our private equity platform has already realized $1.5 billion and deployed $1.9 billion of capital.

With the investments we've made Onyx partners 5 is now 60% invested and non cat 4 is just under 75% invested.

As previously communicated we expect to be and the market with our next on cap Fund later this year.

Followed by Onyx partners and 2022.

Well there are non ex credit.

We are actively fund raising for our new strategies and.

AUM growth to accelerate throughout the remainder of the year Jay.

Jason knew who will provide a more detailed update at our Investor day.

And the quarter, we were opportunistic and executing on our objective to make our CLO business less capital intensive.

We generated total proceeds of $65 million by Accretively selling down portions of our equity and 8 select U S and European CLO.

Most of these and already seen their value increase from refinancing or resetting transactions completed by our team.

Through the sell downs, we were able to reduce our total average equity ownership for the group from approximately 70%.

And to 44%.

Turning to wealth management Gluskin Sheff had another good quarter growth.

Fiji and earning assets by 4%.

Net client inflows for the first quarter since <unk> acquisition.

Access to our private strategies continues to be a strong draw.

With approximately $950 million of client capital now and new strategies and increase of 10% from Q1.

We continue to expect positive net flows at gluskin and for the remainder of the year.

Last quarter I mentioned that we're expanding our ESG program.

In July and Judy cash joined as Onyx as new head of ESG.

She brings a wealth of experience to our team and is already focused on enhancing our firm wide ESG framework and establishing key priorities.

As Jerry mentioned, you'll have an opportunity to hear more from beauty at our Investor day.

Over the past year, we have articulated a number of priorities for our organization and we're making progress with all of them.

Our private equity teams are generating quality opportunities within our core verticals.

And the funds are contributing and longer term returns more aligned to our historical performance and.

Future expectations.

We've diversified with and honest credit, which over time will have a more consistent fee related earning stream and increase profitability.

We feel confident with the level of integration, we've achieved with gluskin sheff and the future potential of that business.

Working together guided by our Onex approach these platforms will provide future value for our shareholders.

We look forward to talking to all of you about this and more detail on September 30th with that I'll turn it over to Chris.

Thanks, Bobby and good morning, everyone.

As Bobby noted, we reported segment earnings of $3 <unk> per share and the quarter, including $2.44 from investing and 60 from our asset and wealth management segment.

Let's get started by looking more closely and onyx as P/e investing results.

The quarter included net gains from private equity of $185 million.

Reflecting an underlying 4% growth return.

When combined with our first quarter and private equity generated year to date net gains of $454 million or 13% gross return.

RPE returns will not always track and public equity markets and the short term and this was the case and Q2 with the S&P returned and 8%.

Of course, we fully expect our portfolio to outperform the public markets and the long run as we have when you look back over the last 12 months are back to the December 2019 pre pandemic marks.

Our Q2 P/e returns reflect continued momentum.

<unk> portfolio, we believe is positioned to generate strong returns going forward.

For those of you that follow US closely you'll know that we've been providing a breakdown of our portfolio based on COVID-19 exposure since Q1 of last year.

With economies continuing to open and rebound we've reverted to thinking about our diversification and performance based on our core industry verticals as reflected on this slide.

You can see that the story hasnt changed much from what we communicated to you and the Covid focused charts last quarter we.

And we've seen consistently positive returns across our well diversified portfolio.

Youll find this slide and the supplemental information package posted to our website.

In addition, and response to shareholder feedback and Youll see our Sip now also includes a summary of our significant private equity investments.

I'll turn now to credit investing.

Our credit portfolio returned 5% and contributed $47 million of net gains while the underlying loan market returns just over 1% and the quarter.

These results included $35 million of net gains from Clo's, representing a 7% quarterly return and over 55% on an LTM basis.

As you know we've been focused on reducing the capital intensity of our CLO business.

To this and we strategically sold down our equity interest and several CLO for total proceeds of about $65 million.

And with values that exceeded our marks.

When you include the capital returned to our regular quarterly distributions.

Onyx as exposures to <unk> was reduced by about $100 million and Q2, which will improve the already attractive return on capital from our CLO platform.

Let's take a look and how our investing activities impacted our allocation of investing.

Overall <unk>.

Investing capital per share was up $1 and 99.

We're about 3% and the second quarter and.

And $6.71.

We're 9% and the first half of 2021.

Adjusting for the capital used to acquire Falcon at the end of 2020.

Our NAV per share is now up 29% from December 2019, pre pandemic levels.

The Q2 composition of investing capital is largely consistent with year end.

With invested assets and 83% of total invested capital.

Pro forma from a cash impact of the <unk>, IPO and new investments and Newport Healthcare and Kumar our invested assets are just under 80%, which continues to represent a strong basis for future growth and hard NAV per share.

Turning now to our asset and wealth management segment.

We generated net earnings of <unk> 60 per share and Q2.

And $2.21 per share and the first half of 2021.

The year over year improvement in Q2 segment earnings reflects continued strength and pay with <unk> 4 and <unk> 5 again accruing meaningful carried interest.

This progress is even more evident and the year over year improvement and first half results.

With $188 million of private equity carry accrued and the first half of 2021.

With all of our PE funds and Carrie.

And fund raise expected for both on our partners and on cap and the next year.

Onyx as private equity manager is positioned to continue its meaningful contribution going forward.

At the credit manager and we continue to focus our attention on growing AUM as a precursor to improving our margins, which currently reflects the upfront investments we've made to support the platform's growth.

Year over year credit fee generating AUM has grown 43% largely driven by the acquisition of Falcon and.

Excluding that acquisition fee generating AUM grew 10% and credit and the last 12 months.

Finally, our wealth management business is making progress growing client capital.

Fee generating client capital is up 4% from Q1 and 9% year to date. This.

And this reflects strong net performance and the funds and solid client inflows.

And with that we'd now be happy to take any questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then 1 on your Touchtone telephone to withdraw your question. Please press the pound key.

And our first question comes from the line of Geoff Kwan with RBC capital markets. Your line is open. Please go ahead.

Hi, good morning.

And I know you.

Talked about I guess, the pro forma cash from the monetization and July but just wondering relative to what.

Things are recorded at June 30th do you have like a ballpark mark to market adjustment for the monetization.

And is that you've done and July just trying to figure out the net net impact of announced.

Sure Yeah, I don't have it to kind of the dollars and cents Jeff.

But if you think about the RSV and.

Power School IPO is combined.

Together, they were a little bit above.

<unk> marks but that that the IPO prices.

And so I think.

You can assume there is a little bit of tailwind there, but all of the upside from those IPO prices is is I'll call. It a good head start on Q3.

Okay.

And then on.

Alaska and chefs and net sales.

Being positive Bobby I think you said in your remarks, you think that this can be sustained through the second half of the year just wanted to understand I guess.

Key drivers around that for you and for the new clients that are coming in are there.

Any interesting trends in terms of profile things like age geography, or whatever and where is the focus in terms of who and how youre targeting new clients.

And then the client base is pretty diversified.

Across kind of Toronto, and Montreal, and specifically the <unk>.

Net flows are benefiting largely from Onyx is owned products being sold through the <unk>.

Oscar and network there has been really really good demand for direct lending product that we have coming out of our policy and acquisition.

Our other credit products are in high demand and is as we're looking toward non cap MLP. We expect that those flows continue to be positive and just generally speaking that the other products that they have are performed are performed well. So that good performance is attracting new dollars.

Okay and just my last question was similar to that on Gluskin has.

What has been generally speaking and I know can vary quarter to quarter and everything tends to be lumpy and high net worth but the mix of money coming in between and new clients versus existing clients, giving more money.

I don't have that number off the top of my head Chris to you I don't have it handy, Jeff, but we can certainly circle back with you.

Continues to be I'd say, a typical mix as you know gaining share of wallet is an important part of that business.

And I just don't have those numbers handy at the moment.

Okay alright, thank you.

Thanks, Jeff.

Thank you and our next question comes from the line of Scott Chan with Canaccord Genuity. Your line is open. Please go ahead.

Good morning.

And then you talked about the CLO and <unk>.

And accretive to 65 million and proceeds and the quarter from a select U S or European CLO is there the opportunity to.

GAAP more capital back with the remaining CLO.

And the U S and European side overtime.

Absolutely, Mark and dependent and independent absolutely.

Karen Rami and the team are constantly looking at that and trying to figure a way to optimize the returns relative to the capital deployed and that product.

Yeah, and I, just would add on that and in addition to the ability to take capital off the table from the CLO that we already have financed I'll say we're sponsored.

Going forward the plan is to put less capital and to each CLO as we grow the business. So that we've got a nice trend line.

In terms of.

Hopefully and ever decreasing percentage of the CLO AUM, that's coming from from Onyx and therefore, just better returns on capital for the business.

Got it and then.

And your opening remarks, you talked about the healthcare sector, where.

I guess with your new disclosure just represents 5% gross private equity capital.

And then you bought new part.

And in the quarter. So is it fair to say that the pipeline is.

The strongest within that sub sector and Youre seeing right now.

No the pipeline is pretty good across all the verticals we're focused on.

On the op side, Josh and Adam and the team have been focused on behavioral.

For the better part of 2 years now and we have a long history and behavior with Magellan and Roche character on 2 prior investment, but I wouldn't take that to me and the next 2 or 3 deals that you see coming out of <unk> health care. It could be the case, but I would expect it to be.

I wouldn't expect it to be that concentrated.

And then can you share a bit more information on the new part of health.

And I know you had provided a descriptive.

Narrative on and I see that <unk> put up less and $200 million of capital towards it but is there any other details that you can provide us that would be.

Got it.

And that that might be helpful for us to look at.

No other financial details and I'll tell you, though that.

And so really interesting.

Part of health care.

The amount of demand for that service and the and the teen and young adult community from people needing.

Those types of residential mental health.

Treatment centers is is really it's really there is so much more demand and supply. So I would expect there to be a lot of organic and de novo growth coming out of that platform and we.

We've capitalized business that companies will be able to do that and have that growth ahead of it we expect that to be.

A good growth story.

For LP.

And last question just on power Squall, you didn't get any.

Like any partial realization from that IPO is that correct thats correct. We use the proceeds to pay down all of the proceeds to pay down debt and the expenses related to the IPO.

Okay got it thank you very much youre welcome.

Thank you and again if you have a question at this time. Please press Star then 1.

That concludes our question and answer session and I would like to turn the conference back over to the company for any further remarks.

And another another good quarter and nice to see it.

And thanks, everybody and I appreciate you joining us today and we really appreciate the opportunity to talk with you at any time, but this is a pretty good medium to do so.

And I can only say enjoy the rest of your summer and we look forward to speaking with you again at our Investor Day on September 30th Thanks, everybody and bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

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