Q3 2022 Onex Corp Earnings Call
Welcome to Onyx third quarter, 2022 conference call and webcast. 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 as a reminder, this conference is being recorded.
I will now turn the conference over to Joe How many imaging director shareholder Relations 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 Le Blanc, President and head of Alixpartners, and Chris Galvin, Our Chief Financial Officer.
Sure.
Earlier. This morning, we issued our third quarter 2022 press release.
DNA and consolidated financial statements, which are available on the shareholders section of our website and have also been filed on SEDAR and our supplemental information package is also available on our website.
As a reminder, all references to dollar amounts on this call are in U S unless otherwise stated.
It 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.
You know I am thinking back to when Onyx was created nearly 40 years ago.
It was built to perform consistently in a wide range of market conditions.
Our focus today remains as it did then on the virtue of disciplined investing.
This includes a bias towards value.
And conservative underwriting and.
And ample liquidity.
This approach has allowed us to convert market dislocations in the moments of opportunity.
We saw this dynamic play during the great financial crisis of 2008 and again during the pandemic.
Today as markets continue to fluctuate in the face of macroeconomic and political uncertainty.
I am confident that our strong culture.
Client relationships and financial position.
It will allow us to emerge.
Even stronger.
To that end we.
We also have to keep our eye on the future too.
To ensure continuity and a strong path for growth and success.
On that note. It is my pleasure and I really mean, a pleasure to announce our proposal to appoint Bobby Le Blanc as Chief Executive Officer. Following our 36th annual General meeting in May of next year.
I've had the pleasure of working alongside Bobby for 23 years.
A consummate professional with a wealth of investment and management experience. He is the ideal person to lead Onyx and drive value for our partners investors and shareholders.
Over the last two years, Bobby as President has played an instrumental role in our strategic plan and has led many of our firm wide initiatives.
In addition to his work with Onyx partners.
He has also been actively engaged with our business platforms.
And is a strong advocate for our one on X approach.
As founder and chairman.
I will certainly continue to remain involved with onyx and to work with Bobby to be part of our growth.
This proposal is conditional.
On an amendment to the multiple voting shares to maintain their current voting entitlement.
Following the transition of rules.
In addition, a five year sunset provision will be added to the MBS.
Shareholders will of course be asked to approve the proposal at our next AGM.
We believe that this is the right approach.
Creating an appropriate balance between continuity and planning for the future.
We wanted to provide shareholders with a clear and orderly indication of our succession plans.
I wanted to thank the entire Onyx team.
Their remarkable support in this time of great change and opportunity.
With that.
Let's turn it over to Bobby for more on the quarter Bobby.
Good morning, everyone and thank you Gerry.
I've had the privilege of being an ex for 23 years.
Seeing the organization grow and evolve.
Today, we benefit from our nearly 40 year track record of.
Our strong investing combined with the momentum.
Culture and drive to succeed.
We continue to execute on our strategic plan.
We remain focused on delivering growth and shareholder value.
I am honored to have the support of Jerry and the board and look forward to engaging with many of you in the months ahead.
Jerry has been a terrific teacher mentor and friend to me and I.
I am grateful for our continued partnership.
Well it was important to provide clarity on our leadership transition.
Our main priority remains the day to day management of our businesses.
We're navigating industry end market challenges effectively maintain.
Maintaining a clear focus on performance.
And long term growth opportunities.
Our private equity portfolio performed well in Q3.
Outpacing the broader equity indices.
We're actively working with our companies to mitigate near term macroeconomic impacts and execute our strategic initiatives.
I previously mentioned value creation plans.
The comprehensive Roadmaps, we develop with our portfolio companies early in our ownership.
With our partners. These plans allow us to build consensus around priorities and the pathways to achieve them.
We recently completed a new plan it is global.
We're already seeing the benefits.
Including strong revenue and EBITDA performance.
The completion of two add on acquisitions and other value added initiatives.
Recently, we held the first close for Onyx partner six but.
But the next close planned for early in the new year.
We reached aggregate commitments of approximately $2 million, including <unk> commitment of $1 5 billion and <unk>.
Welcome some of our long term partners as investors.
As I've said before and has been largely evident across the industry.
This is a tough fund raising environment.
We expect this fund rates would be longer than what we have experienced with previous funds.
We continue to have deployment flexibility and <unk>, which room for one or two more investments.
<unk> is also now actively fund raising.
What's the expected first close for its new fund on Caf II before the end of the year.
On <unk> four just too much capacity for one more investment.
And despite the general slowdown in activity.
The team continues to find interesting opportunities within these sectors of emphasis.
Overall, the industry has experienced a significantly slower deployment environment with a tighter financing market and continued valuation expectation gaps between buyers and sellers.
Conditions should improve as markets normalize in the meantime, we maintain our usual robust discipline to diligence new opportunities.
Turning to credit our strategies are holding up well despite the challenging conditions.
Investors continue to be attracted to credit given the rising interest rate environment and the need to achieve return objectives without stretching for risk.
These conditions create a healthy tailwind for our credit business and are supportive of our longer term growth objectives.
We had our first close for unexpired seven in early November .
The fund, which has a target of $1 5 billion.
Close on approximately $430 million of committed third party capital.
We're also actively fund raising with institutional investors for Falcons direct lending strategy.
We expect to have more to report in our next quarter.
Looking at our other platforms.
On X Transportation partners has also officially begun fundraising.
For the first close expected in the first half of next year.
Our private wealth platform Gluskin sheff.
Completed its fourth consecutive quarter of net positive inflows.
This accomplishment in today's market.
Dave Kelly and the team continue to execute our strategic initiatives to allow us to scale the business more rapidly.
Both of them are client and advisor perspective.
And we continue to enhance our wealth planning offering.
Most recently with the addition of a team of seasoned insurance advisors with expertise in both tax and estate planning.
Progress is being made across all of our businesses within our one on X approach.
Having incremental opportunity and growth.
Our diversification in recent years has been key to reducing our reliance on any one part of the market.
Broadening our revenue streams, and allowing us to begin to deliver on our long term objectives.
Before closing I wanted to say a few words about our investing capital which ended the quarter just about $90 a share U S or $123 Canadian.
At these levels Onyx shares are trading at a substantial discount to their intrinsic value.
The discount is even more stark when considering our cash position and public holdings.
While sentiment towards the broader market.
And alternative asset managers in particular is challenging right now.
We have great confidence in the intrinsic value of our business.
As a reminder, within private equity we have a robust valuation process that we undertake every quarter to mark our investments.
They are reviewed and audited each quarter and at the same marks we provide to our limited partners.
Moreover, history has shown that our valuations tend to be conservative compared to ultimate realizations.
We believe strongly in the value of an onyx shareholders own.
And our backing that up with the investment in our own shares.
Although its an opportunity we prefer not to have.
We believe we know a good value when we see one.
From the start of the year through October we bought back $4 7 million shares.
We're $3 5 million of that in the last four months alone.
We will continue to be opportunistic.
I believe that existing shareholders will be rewarded.
We know, it's our responsibility to continue to deliver shareholder value and we're committed to doing it.
We have built a strong platform and by remaining true to our investment principles and sticking to our plan we have confidence we will succeed.
Now hand, the call over to Chris.
Thanks, Bobby and good morning, everyone.
Invest in capital per share was down less than 1% in Q3 and up 4% over the last year.
As Bobby alluded to in his remarks RPE results continue to provide outperformance compared to the public market.
The S&P 500, and the MSCI World mid cap indices down about 5% to 6% in the quarter.
Moreover share repurchases at a substantial discount to NAV.
You did about $1 10, a value per share in the quarter.
The overall value of our PE portfolio was down 2% in Q3, reflecting continued market volatility higher interest rates and other macro factors.
However, $82 million or almost 70% of the Q3 mark to market decline in pay reflects FX losses from our non U S investments.
Notwithstanding the overall decline there were pockets of outperformance with power school up about 40% in the quarter as well as Mark ups in other holdings with improved performance or outlook.
During the quarter Onyx realized $295 million from its PE investments.
Primarily from the previously announced realizations of part II AIP and Ryan LLC.
While market conditions for additional monetization or less favorable today will remain focused on execution across the portfolio. While we wait for this cycle to run its course.
Turning to credit.
We generated a $10 million gain or 2% return from credit investments in Q3, consistent with the credit Suisse leveraged loan index, which was up about 1%.
Performance of our CLO assets remains strong as we received $19 million in regular quarterly distributions.
Overall, our investing capital per share ended the quarter at $90 26 or.
Our Canadian $123 and 71.
Now turning to the asset management side of the business.
Our fee generating AUM of $32 9 billion was down less than 2% in the quarter and flat from year end.
Market headwinds were largely offset by new capital raised this year, notably $1 4 billion of CLO, AUM, including CLO 25, which closed in the quarter.
Excluding those mark to market and FX headwinds fee.
Key generating AUM is up just over 2% so far this year.
As Bobby mentioned the fund raising markets are challenging certainly more so than when we set targets for 2022.
We now project raising about $3 billion in fee generating AUM for 2022, once we close out Q4 about.
About a 10% growth increase for the year.
While short of our target we believe much of the shortfall is timing and we can make up a good portion of that in 2023.
We expect to have an update on 2023 plans for you next quarter.
Despite the choppy markets and to a degree because of them we remain positive on our long term prospects.
We expect new opportunities at attractive entry valuations to drive strong investment performance for on X and our clients.
Moreover, our ability to invest across the entire capital structure continues to resonate with clients and bodes well for our ability to grow the asset manager going forward.
As we continue to build on excess capacity to generate FRE, let's turn to where we're at today.
In the quarter, we had an FRE loss of $15 million, including a 6 million loss from the asset management platform.
The year over year decline was driven by higher private equity expenses that include the buildout of on X transportation partners.
On X again generated meaningful distributable earnings $193 million in Q3, driven by PD realizations and CLO distributions.
And it's important to remember the meaningful opportunity for value creation from Onyx as participation in carried interest.
Although as you would expect we had a reversal of unrealized carried interest in the quarter. We ended Q3 with $168 million of unrealized carry.
And in the long term, we expect carrier to generate significantly more value with shareholders, having a stake in nearly $25 billion.
Of carry paying AUM at quarter end.
Finally, as Bobby mentioned, one attractive opportunity the markets have already presented is the ability to invest in the business we know best.
In Q3, we repurchased an additional two 4 million shares and remained through October bringing our total repurchases this year to $4 7 million shares.
Repurchases captured more than $230 million Canadian dollars of heart.
For our continuing shareholders.
As Jerry said at the outset Onyx as approach has always included investing discipline.
And an appreciation for the value of liquidity.
These cornerstones will serve us well in the current market.
Our diversified private equity portfolio remains well positioned to generate value going forward.
With 85% of the debt at our operating companies matures in 2025 or later.
And we continue to work with our businesses to execute on their value creation plans.
And on X itself benefits from a debt free balance sheet.
One $3 billion of cash and near cash and consistent distributable earnings available for reinvestment.
As a result, we're able to execute on strategic initiatives, while being ready to take advantage of the opportunities. We expect the current markets to provide.
That concludes the prepared remarks, we'll be happy to take any questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Nik Priebe from CIBC. Your question. Please.
Okay. Thanks, just wanted to start with a question on <unk> share price and the discount to NAV.
Are there any actions you feel could be taken to help narrow that discount and just to float and idea I'm wondering if you would consider selling and LP interest in the secondary market at a narrower discount to NAV and the stock trades in order to demonstrate value and then use the proceeds to.
Accretively buy back stock or is there anything else that you might have in mind to help sort of illustrate value.
Yeah, Hi, this is Bobby again.
We think about those kind of things all the time.
That secondary market that you referred to was very robust in the first half of the year it sense.
Fallen off a bit.
That market would bid our interest in one of our funds is not something we'd be interested now but that that trade exists and when do you think about.
Secondary buying above 100 cents on the dollar in the first half of the year and the implied value of our PE portfolio. When you adjust for cash at our public holdings that arbitrage is real.
Whether it's a 100 today or 105 today versus a market that's less it's nowhere.
So much higher than the.
Public shareholders are subscribing to the value of the portfolio. So we are thinking about that stuff. All the time, we just wanted to if we do something like that we wanted to do it from a position of strength.
Market, where people will value our assets less.
And we believe their work, but there are many things that you can do like that and over time, we'll look at them and when they make sense I think that would be a good proof point.
Value is really there even though the market is just not.
Yes, and just as a follow up fair enough Chris Galvin.
The other thing with that kind of trade.
So.
Prove out an easy way I'll call it to build out our fee generating AUM because the other nice thing about those types of transactions.
It's an opportunity to take something off our balance sheet and put it in the hands of our fee paying LP. So certainly something thats on our radar.
That usually comes with a staple to the new fund.
There's a lot of there's a lot of moving parts in there, but it's something that we.
We are we always we've been considering for the last for a while I think it would be a very tangible proof points.
Yes, okay.
And then just moving on to the fundraising side.
A lot of the alternative asset managers in the U S has emphasized how.
Underpenetrated private alternative asset classes like private equity or.
Among high net worth investor portfolios, and how Thats a source of upside longer term in terms of third party demand.
You do have access to captive distribution that channel question, but.
The advance fundraising efforts for <unk> six are you, making a greater effort to target commitments from high net worth investors.
How do you think about that opportunity in general.
No I think that is a very big opportunity.
For us and for our pro forma for <unk>, just generally speaking for all of our products credit as well.
I think the high net worth channel northwest is very Underpenetrated, especially in Canada, where our brand is.
It's really good we.
We do have glass can as you mentioned and I think as you know we publicly talked about it we just distributed a $1 billion of our credit products through that channel and we will be distributing our bolt on cap MLP products through that channel, but we're also working with other Canadian and U S banks that have.
Really good high network channels to try to penetrate those as well so I think youll see more activity from us trying to tap that channel and not.
Not just so much diversify away from institution, but to have another avenue of growth.
For fee generating AUM. It is an opportunity we're quite excited about.
Yes, Okay and then.
No secret the fund raising environment is challenging this year in part because of the denominator effect and also the outperformance of <unk> as an asset class but.
Another factor of course influencing fundraising success as historical investment performance.
And I know returns on op five are strong.
Certainly strong in absolute terms, but private equity has also been very strong as an asset class. The last few years, how would you say op <unk> returns measure up against other funds are.
Similar vintage who might be in the market at the same time as you.
So I think <unk> is off to a very good start these core tiles early on in a funds life can move around I think it's really important to note that historically, we've never utilized.
Financial leverage subscription lines would be specific to to manage IRR like if you were to make that one adjustments, which will do for op search going forward.
Fund five is easily a forefront sorry first quartile fund right now so we feel really good about that I think is 2023.
Plays out in that.
Portfolio 45 becomes more seasons, I think it's going to give lp's confidence that all the changes we've made for the last three or four years of DLP side are working.
And it is if I could touch on it is a challenging fundraising environment.
We had the first close that we referred to on the call, but we will be in the market for a long time.
With op X, but I think as every quarter <unk> has that reinforces.
It's relative.
Performance I think it's going to it's going to help.
Okay very good.
Ill pass the line thanks for taking my questions. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Geoff Kwan from RBC capital markets. Your question. Please.
Hi, Good morning, Gary just wanted to start off a question for you just with the move to being.
Sure Chairman you talked about still being involved but just how would you describe.
How that involvement in the company looks like.
When that happened versus what Youre doing now in terms of pump time commitment nature of the work that we've been doing with the company.
Hey, Jeff It's Chris Galvin.
Yes.
I think today.
We decided to communicate this change early to provide clarity on the planned leadership transition.
And certainly we believe that this next step is evidence of a well planned and orderly succession.
And it's going to be viewed as a positive for our shareholders.
Other reason, we announced today, which provide us lots of time to proactively engage with our shareholders over the next six months.
We don't want to get too ahead of those discussion on today's call.
So really would sort of direct you in the meantime, as we rollout both back communication plan to direct any.
Detailed questions you might have to our shareholders relations team, but we're going to be very proactive in out there with our shareholders and making sure. They have a full understanding of what's proposed.
Prior to the circular being published in the spring and in advance of the May AGM.
Okay.
And then just on the fundraising for <unk> I know, it's hard to generalize, but is there anything you can talk about in terms of just the nature of the the commentary youre getting back from the Lps that youre talking to and then in terms of.
Final close.
Do you have an idea because you talked about it being longer than usual like what does that timeline look like in terms of how youre thinking about what the fundraising process would be and does that impact with LP five being almost fully vested.
The appetite in terms of looking at new investment opportunities.
Yes, Theres a lot of there's a lot of them are so so let me try to address all of it. So 2022 I think we've been very vocal about how crowded the market was.
And it was we had a couple of our long term several of our long term Lps and the first close we'll have a second close early in 2003 as I mentioned because people were just out of capacity in 2022 that would that is a common theme that we're hearing as well as we like the improvement we've seen.
<unk> and <unk> four over the last couple of years, we like the way op five looks and I think youll see hopefully more confidence build in the <unk>.
Again, that's a positive all.
All the changes we made have been viewed as a positive with actual results how long we're going to be in the market. Technically you have 18 months from the first close so that could put you into Q1 of 2024 or through Q1 of 2024.
I'm not sure, whether we will need that or not but thats that sort of it.
Technical timeline, we have in it.
It's tough to know its tough to know what the fund raising environment will be in 2023, but the more quarters.
With <unk> four.
Stabilizing it.
A decent gross IRR in the sort of <unk>.
<unk>, 14% and op five booking it as good as this hopefully that gives.
People the confidence that we're on the right tracker.
Okay.
If I could maybe sneak in one last question.
From a strategic perspective.
How much do you think about.
Being a traditional private equity now you got credit, but living and to other asset classes because when you have some I think some of your peers offer other types of.
Products in different asset classes, there, just whether or not that.
Our competitive advantage for them or not when thinking about.
The fundraising aspect in dealing with the <unk> that you're doing.
Yes. So look I think there is there is usually value and diversification. So we historically have done a private equity firm only.
In today's markets.
A lot of our credit product products are in really high demand. So we ought to be able to see some growth there as we look to the future strategically.
We're in the early stages of asking ourselves.
Else should we be competing in not only P in credit and transportation as a form of <unk>, but are there other asset classes that we should think about that would create more enterprise value for on X again early innings, we could do that organically like we've done on a transportation partners, obviously, given our our pristine balance.
We could do that inorganically as well, but I think it's too early to tell but I think the value of diversification in a market like this.
Is good I think.
I'd like the fact that we're in credit and these other things.
Because it's just given us, let's just kind of mutes any weakness that you might have in any product at any point in time.
Okay. Thank you.
Welcome.
Thank you and ask for a reminder, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.
One moment for our next question.
Our next question comes from the line of Graham Ryding from TD Securities. Your question. Please.
Hi.
Good afternoon.
I just wanted to start with.
I guess the change in the multi voting structure.
I think originally the terms were in that.
Change in the CEO would trigger the collapse of the multi building structures, Hawaii proposing now to extend.
The voting in the board rights for another five years Nicolas just staying with the original terms.
Yeah, Hey, Greg its Chris Kevin again.
I think you've got to look at the transition as a whole.
And we believe that.
What we've done over the last two years and what we're proposing to do going forward.
It reflects a really well thought through transition for the company and puts it on the right path for growth going forward.
And believe that when you look at it together that what's being proposed.
As a positive change for the company and we believe shareholders are going to agree.
As I said, we're going to have lots of proactive discussions with our shareholders and the run up to an actual boat in may so im not going to go any further on specifics around the proposal on this call.
Okay understood.
On the PE fundraising side so your commitment.
For Oh P. Six $1 5 billion I think thats lower than your $2 billion commitment for <unk> should we be interpreting anything there in terms of.
The targeted size for this next fund are you thinking it's going to be lower than <unk>.
Plus.
No. So we've told our <unk> at our commitment will be between $1 $5 2 billion.
When we when we set the $1 five as the initial close we.
Did that as a function of our liquidity and other things that we have going on internally at Onyx because we just wanted to make sure that we have plenty to fund.
Commitments as they come but you shouldnt read anything into that we've told you <unk> will be between 1 billion and $5 two and if our liquidity.
To be as good as I wouldn't be surprised if it is to in this case.
Okay. So theres no I haven't.
You put out a targeted size for <unk> overall.
Sorry, I missed that question.
You haven't.
Tablets are targeted size for <unk> overall.
It remains I don't know who does that.
I think where we sit today it needs to remain fluid just because I don't I really don't know on what 2023, we're going to look we're going to have a fun. So don't get me wrong.
Alex partners is it going to have a fun way over $7 billion balance sheet. Like this is a moment in time of a bumpy road in the fund raising environment, how big the fund is going to be relative to <unk> I think it would be it wouldn't be fair to me to guess I think what we ought to do is each quarter tell you, how we're doing and as we get further into it to have an idea of the <unk>.
<unk> of which.
High versus low and where we expect to come out and we will communicate that with you every quarter.
Okay understood.
Chris maybe.
Chris can you just give us an update or remind us sort of what to expect here in terms of the implications for run rate private equity fees as youre transitioning from <unk>.
First closes on op six and on cap.
And then from your adjusted funds.
Sure and ill.
I will just focus on op because those numbers are a little bit more memorable for me, but happy offline take you through the math because I think you can sort of be.
Based upon our public disclosures kind of kind of do the math.
Seasonally but happy to take you through on cap offline, if you looked at <unk>.
With about 500 billion.
Excuse me 500 million of third.
<unk> third party capital.
<unk> if its investment period was to end today and op six was to go active.
Our run rate fee for private equity would temporarily be reduced annually by about call it $35 million.
Now as Bobby mentioned, we thought I think call it around 600 $650 million.
Capital remaining to invest in op five so we're not expecting that to happen anytime real soon.
But that would be the impact if it was the kind of happened today with $500 million of third party capital in <unk> six now as a reminder.
<unk>.
As we complete subsequent closes six as Bobby said potentially through early 2024.
All investors in the fund events do pay management team back to the effective date of <unk>. So there will be.
Timing issue between what I kind of think of its economic management fee revenue and reported GAAP management pre revenue probably kind of over the next 15 months or so.
I don't know if that's answering your question, but again I don't have those numbers for on cap handy, but I could take you through that offline.
That's helpful. And then so what is the trigger then for your fees to move from for <unk> five.
To move from sort of committed run rate and invest it isn't just once you get that last investment.
That's right once we make the determination that essentially once we make the determination that we're now in the market hunting for an investment for <unk> as opposed to still looking for investments to close out <unk> and so that's at least one investment away.
But potentially too.
Understood Okay.
And then my last question if I could just.
Maybe an update on the CLO side can you give us some commentary on.
And how you see that market performing I understand there's been some pullback broadly from sort of the industrial base given the volatile markets, but also the supply of loans.
As lower just given the lower activity. So maybe some commentary there please.
Our CLO portfolios.
Held up quite well.
But the new issuance is quite slow for the reason you just don't mind Theres just not a lot of M&A activity right now, particularly on the PE side.
The rates have risen quickly sort of the bias spread on new deals as cause volume to slow down, which obviously has is directly correlated.
On the CLO side, but.
But again, the rising rates the assets liabilities that all seems to be working reasonably well right now and we will continue to keep an eye on it but the distributions are coming in as normal as Chris mentioned and.
No red flags or as of now.
Great. That's it for me thank you.
Thank you. 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.
Thank you operator.
Thanks, again to everyone for joining us today.
We really appreciate your continued support and we look forward to speaking with you again next quarter until then we wish everyone, a safe and joyous holiday season.
Later.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
Okay.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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Welcome to <unk> third quarter, 2022 conference call and webcast. 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.
A reminder, this conference is being recorded.
I will now turn the conference over to Joe how many managing director shareholder Relations Communications at Onyx. Please go ahead.
Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website.
Leading the call today are Gerry Schwartz, our founder and CEO , Bob <unk> block, President and head of <unk> partners, and Chris Kevin actually financial effect there.
Earlier. This morning, we issued our third quarter 2022 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. Our supplemental information package is also available on our website.
As a reminder, all references to dollar amounts on this call are in U S unless.
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.
I am thinking back to when Onyx was created nearly 40 years ago.
It was built to perform consistently in a wide range of market conditions.
Our focus today remains as it did then on the virtue of disciplined investing.
This includes a bias towards value.
And conservative underwriting.
And ample liquidity.
This approach has allowed us to convert market dislocations in the moments of opportunity.
We saw this dynamic play during the great financial crisis of 2008 and again during the pandemic.
Today as markets continue to fluctuate.
In the face of macroeconomic and political uncertainty.
I am confident that our strong culture.
Relationships and financial position.
We will allow us to emerge.
Even stronger.
To that end we.
We also have to keep our eye on the future too.
To ensure continuity and a strong path for growth and success.
On that note. It is my pleasure and I really mean, a pleasure to announce our proposal to appoint Bobby Le Blanc as Chief Executive Officer. Following our 36th annual General meeting in May of next year.
I've had the pleasure of working alongside Bobby for 23 years.
Consequent professional with a wealth of investment and management experience. He is the ideal person to lead Onyx and drive value for our partners investors and shareholders.
Over the last two years, Bobby as President. He has played an instrumental role in our strategic plan and has led many of our firm wide initiatives.
In addition to his work with Onyx partners.
He has also been actively engaged with our business platforms.
And is a strong advocate for our one on X approach.
As founder and chairman.
I will certainly continue to remain involved with onyx and to work with Bobby to be part of our growth.
This proposal is conditional.
On an amendment to the multiple voting shares to maintain their current voting entitlement.
Following the transition of rules.
In addition, a five year sunset provision will be added to the MBS.
Shareholders will of course be asked to approve the proposal at our next AGM.
We believe that this is the right approach.
Creating an appropriate balance between continuity and planning for the future.
We wanted to provide shareholders with a clear and orderly indication of our succession plans.
I wanted to thank the entire on X gene.
Their remarkable support in this time of great change and opportunity.
With that.
Let's turn it over to Bobby for more on the quarter Ravi.
Good morning, everyone and thank you Gerry.
I've had the privilege of being an ex for 23 years.
Seeing the organization grow and evolve.
Today, we benefit from our nearly 40 year track record of strong investing combined with the momentum culture and drive to succeed.
We continue to execute on our strategic plan.
We remain focused on delivering growth and shareholder value.
I am honored to have the support of Jerry and the board and look forward to engaging with many of you in the months ahead.
Jerry has been a terrific teacher mentor and friend to me.
And I am grateful for our continued partnership.
While it was important to provide clarity on our leadership transition.
Our main priority remains the day to day management of our businesses.
We're navigating industry end market challenges effectively maintain.
Maintaining a clear focus on performance.
And long term growth opportunities.
Yes.
Our private equity portfolio performed well in Q3.
Outpacing the broader equity indices.
We're actively working with our companies to mitigate near term macroeconomic impacts and execute on our strategic initiatives.
I previously mentioned value creation plans.
The comprehensive Roadmaps, we develop with our portfolio companies early in our ownership.
With our partners. These plans allow us to build consensus around priorities and the pathways to achieve them.
We recently completed a new plan it is global.
We're already seeing the benefits.
Including strong revenue and EBITDA performance.
The completion of two add on acquisitions and other value added initiatives.
Recently, we held the first close for Onyx partners six with.
But the next close planned for early in the new year.
We reached aggregate commitments of approximately $2 million.
Including <unk> commitment of $1 5 billion.
And welcome some of our long term partners as investors.
As I've said before and has been largely evident across the industry.
This is a tough fund raising environment.
And we expect this fund raise to be longer than what we have experienced with previous funds.
We continue to have deployment flexibility and <unk>, five which room for one or two more investments.
<unk> is also now actively fund raising.
As expected first close for its new fund on Caf II before the end of the year.
<unk> four still have capacity for one more investment.
And despite the general slowdown in activity.
Team continues to find interesting opportunities.
Within this sectors of emphasis.
Overall, the industry has experienced a significantly slower deployment environment with a tighter financing market and continued valuation expectation gaps between buyers and sellers.
Conditions should improve as markets normalize in the meantime, we maintain our usual robust discipline to diligence new opportunities.
Turning to credit our strategies are holding up well despite the challenging conditions.
Investors continue to be attracted to credit given the rising interest rate environment and the need to achieve return objectives without stretching for risk.
These conditions create a healthy tailwind for our credit business and are supportive of our longer term growth objectives.
We had our first close for unexpected <unk> seven in early November .
The fund, which has a target of $1 $5 billion claw.
Close on approximately $430 million of committed third party capital.
We're also actively fund raising with institutional investors for Falcon as direct lending strategy.
Expect to have more to report in our next quarter.
Looking at our other platforms.
Next transportation partners has also officially begun fundraising.
So the first close expected in the first half of next year.
Our private wealth platform Gluskin sheff complete.
<unk> completed its fourth consecutive quarter of net positive inflows a nice accomplishment in today's market.
Dave Kelly and the team continue to execute our strategic initiatives to allow us to scale the business more rapidly both from a client.
Client and advisor perspective.
And we continue to enhance our wealth planning offering.
Most recently with the addition of a team of seasoned insurance advisors with expertise in both tax and estate planning.
Progress is being made across all of our businesses within our <unk> approach.
Having incremental opportunity and growth.
Our diversification in recent years has been key to reducing our reliance on any one part of the market.
Broadening our revenue streams, and allowing us to begin to deliver on our long term objectives.
Before closing I wanted to say a few words about our investing capital which ended the quarter just above $90 a share U S were $123 Canadian.
At these levels on a shares are trading at a substantial discount to their intrinsic value.
The discount is even more stark when considering our cash position and public holdings.
While sentiment towards the broader market and.
And alternative asset managers in particular is challenging right now.
We have great confidence in the intrinsic value of our business.
As a reminder, within private equity we have a robust valuation process that we undertake every quarter to mark our investments.
They are reviewed and audited each quarter I know the same March we provide to our limited partners.
Moreover, history has shown that our valuations tend to be conservative compared to ultimate realizations.
We believe strongly in the value of an honest shareholders.
And our backing that up with the investment in our own shares.
Although it is an opportunity we prefer not to have we believe we know a good value when we see one.
From the start of the year through October we bought back $4 7 million shares.
With $3 5 million of that in the last four months alone.
We will continue to be opportunistic.
We believe that existing shareholders will be rewarded.
We know, it's our responsibility to continue to deliver shareholder value.
Committed to doing it.
We have built a strong platform.
By remaining true to our investment principles and sticking to our plan we have confidence we will succeed.
Now I'll hand, the call over to Chris.
Thanks, Bobby and good morning, everyone.
Investing capital per share was down less than 1% in Q3 and up 4% over the last year.
As Bobby alluded to in his remarks RPE results continue to provide outperformance compared to the public market with the S&P 500, and the MSCI World mid cap indices down about 5% to 6% in the quarter.
Moreover share repurchases at a substantial discount to NAV.
We did about $1 10 of value per share in the quarter.
The overall value of our PE portfolio was down 2% in Q3, reflecting continued market volatility higher interest rates and other macro factors.
However, $82 million or almost 70% of the Q3 mark to market decline in pay reflects FX losses from our non U S investments.
Notwithstanding the overall decline there were pockets of outperformance with power school up about 40% in the quarter as well as markups and other holdings with improved performance or outlook.
During the quarter Onyx realized $295 million from SPE investments.
Primarily from the previously announced realizations of par to AIP.
And Ryan LLC.
While market conditions for additional monetization or less favorable today will remain focused on execution across the portfolio. While we wait for this cycle to run its course.
Turning to credit.
We generated a $10 million gain or 2% return from credit investments in Q3, consistent with the credit Suisse leveraged loan index, which was up about 1%.
Performance of our CLO assets remains strong as we received $19 million in regular quarterly distributions.
Overall, our investing capital per share ended the quarter at $90 26.
Canadian $123 and 71.
Now turning to the asset management side of the business.
Our fee generating AUM of $32 9 billion was down less than 2% in the quarter and flat from year end.
Market headwinds were largely offset by new capital raised this year, notably $1 4 billion of CLO, AUM, including CLO 25, which closed in the quarter.
Excluding those mark to market and FX headwinds fee.
Fee generating AUM is up just over 2% so far this year.
As Bobby mentioned the fundraising markets are challenging certainly more so than when we set targets for 2022.
We now project raising about $3 billion in fee generating AUM for 2022, once we close out Q4 about.
About a 10% growth increase for the year.
While short of our target we believe much of the shortfall is timing and we can make up a good portion of that in 2023.
We expect to have an update on 2023 plans for you next quarter.
Despite the choppy markets and to a degree because of them we remain positive on our long term prospects.
We expect new opportunities at attractive entry valuations to drive strong investment performance for on X and our clients.
Moreover, our ability to invest across the entire capital structure continues to resonate with clients and bodes well for our ability to grow the asset manager going forward.
As we continue to build on excess capacity to generate FRE, let's turn to where we're at today.
In the quarter, we had an FRE loss of $15 million, including a $6 million loss from the asset management platform.
The year over year decline was driven by higher private equity expenses that include the buildout of on X transportation partners.
On X again generated meaningful distributable earnings $193 million in Q3, driven by PD realizations and CLO distributions.
And it's important to remember the meaningful opportunity for value creation from Onyx as participation in carried interest.
Although as you would expect we had a reversal of unrealized carried interest in the quarter. We ended Q3 with $168 million of unrealized carry.
And in the long term, we expect carrier to generate significantly more value with shareholders, having a stake in nearly $25 billion of carry paying AUM at quarter end.
Finally, as Bobby mentioned, one attractive opportunity the markets have already presented is the ability to invest in the business we know best.
In Q3, we repurchased an additional two 4 million shares and remained through October bringing our total repurchases this year to $4 7 million shares.
These repurchases captured more than $230 million Canadian dollars apart.
For our continuing shareholders.
As Jerry said at the outset on ex US approach has always included investing discipline.
And an appreciation for the value of liquidity.
These cornerstones will serve us well in the current market.
Our diversified private equity portfolio remains well positioned to generate value going forward.
<unk>, 85% of the debt at our operating companies matures in 2025 or later.
And we continue to work with our businesses to execute on their value creation plans.
And onyx itself benefits from a debt free balance sheet.
One $3 billion of cash and near cash and consistent distributable earnings available for reinvestment.
As a result, we're able to execute on strategic initiatives, while being ready to take advantage of the opportunities. We expect the current markets to provide.
That concludes the prepared remarks, so we're happy to take any questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Nik Priebe from CIBC. Your question. Please.
Okay. Thanks, just wanted to start with a question on extra share price and the discount to NAV.
Are there any actions you feel could be taken to help narrow that discount and just to float and idea I'm wondering if you would consider selling and LP interest in the secondary market at a narrower discount to NAV and the stock trades in order to demonstrate value and then use the proceeds to.
Accretively buy back stock or is there anything else that you might have in mind to help sort of illustrate value.
Yes, Hi, Bobby Yes, we.
We think about those kind of things all the time.
And that secondary market that you referred to was very robust in the first half of the year at defense has fallen off a bit.
Where that market would bid our interest in one of our funds is not something we'd be interested now but that that trade exists and when do you think about.
Secondary buying above a 100 cents on the dollar in the first half of the year and the implied value of our PE portfolio. When you adjust for cash and our public holdings that arbitrage is real.
It's a 100 today are 105 today versus a market that's less it's nowhere.
So much higher than the than the deep the public shareholders are subscribing to the value of the portfolio. So we are thinking about that stuff. All the time, we just wanted to if we do something like that we wanted to do it from a position of strength.
Not in a market where people will value our assets less.
And we believe their work, but there are many things that you can do like that and over time, we'll look at them and when they make sense I think that would be a good proof point.
Okay.
The value is really there even though the market is just not.
Yes, just as a follow up fair enough Chris Galvin.
The other thing with that kind of trade.
Also.
Prove out an easy way I'll call it to build out our fee generating AUM because the other nice thing about those types of transactions.
It's an opportunity to take something off our balance sheet and put it in the hands of our fee paying LP. So certainly something thats on our radar.
And that usually comes with a staple to the new front, there's a lot of there's a lot of moving parts in there, but it's something that we.
We are we always we've been considering for the last little while I think it would be a very tangible proof points.
Yes, okay.
And then just moving on to the fundraising side.
A lot of the alternative asset managers in the U S has emphasized how.
Underpenetrated private alternative asset classes like private equity or.
Among high net worth investor portfolios, and how Thats a source of upside longer term just in terms of third party demand.
You do have access to captive distribution in that channel the question, but.
The advance fundraising efforts for <unk> six are you, making a greater effort to target commitments from high net worth investors.
How do you think about that opportunity in general.
I think that is a very big opportunity.
For us and for our pro forma for <unk>, just generally speaking for all of our products credit as well.
I think the high net worth channel no to us is very underpenetrated, especially in Canada, where our brand is.
It's really good we.
We do have gluskin as you mentioned and I think as you know we've publicly talked about it we just distributed a $1 billion of our credit product through that channel and we will be distributing our bolt on cap MLP products through that channel, but we're also working with other Canadian and U S banks that have.
Really good high network channels to try to penetrate those as well so I think youll see more activity from us trying to tap that channel and.
Not to so much diversify away from institutional but to have another avenue of growth.
For fee generating AUM is an opportunity we're quite excited about.
Yes, Okay and then.
No secret the fund raising environment is challenging this year in part because of the denominator effect and also the outperformance of <unk> as an asset class but.
Another factor of course influencing fundraising success is historical investment performance.
And I know returns on op five are strong.
Certainly strong in absolute terms, but private equity has also been very strong as an asset class. The last few years, how would you say op fives returns measure up against other funds are.
Similar vintage who might be in the market at the same time as you.
So I think <unk> is off to a very good start these core tiles early on in a funds life can move around.
It's really important to note that historically, we've never utilized.
Financial leverage subscription lines would be specific to to manage IRR like if you were to make that one adjustments, which will do for op search going forward.
Fund five is easily a forefront sorry first quartile fund right now so we feel really good about that I think is 2023.
Plays out that.
Portfolio 45 becomes more seasons, I think it's going to give lp's confidence that all the changes we've made for the last three or four years of DLP side are working.
And it is if I could touch on it is a challenging fundraising environment.
We had the first close that we referred to on the call, but we will be in the market for a long time.
We're going to be six but I think as <unk> every quarter <unk> has that reinforces.
It's relative.
Performance I think it's going to it's going to help.
Okay very good.
Ill pass the line thanks for taking my questions. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Geoff Kwan from RBC capital markets. Your question. Please.
Hi, Good morning, Gary I, just wanted to start off a question for you just with the move to being.
Sure Chairman.
Talked about still being involved but just how would you describe.
How that involvement in the company looks like.
When that happens versus what Youre doing now in terms of pump time commitment nature of the work.
Can we be doing with the company.
Hey, Jeff It's Chris Galvin.
Yes.
I think today.
We decided to communicate this change early to provide clarity.
The planned leadership transition.
And certainly we believe that this next step is evidence of a well planned and orderly succession.
And it is going to be viewed as a positive for our shareholders.
The reason, we announced today, which provide us lots of time to proactively engage with our shareholders over the next six months.
We don't want to get too ahead of those discussion on today's call. So really would sort of direct you in the mean time as we rollout both back communication plan to direct any.
Detailed questions you might have to our shareholders relations team, but we're going to be very proactive in out there with our shareholders and making sure. They have a full understanding of what's proposed.
Prior to the circular being published in the spring and in advance of the May AGM.
Okay.
And then just on the fundraising for our LP six I know, it's hard to generalize, but is there anything you can talk about in terms of just the nature of the the commentary youre getting back from the Lps that youre talking to and then in terms of.
Final close.
Do you have an idea because you talked about it being longer than usual like what does that timeline look like in terms of how youre thinking about what the fundraising process would be and does that impact with LP five being almost fully vested.
The appetite in terms of looking at new investment opportunities.
Yes, Theres a lot of there's a lot of them are so so let me try to address all of it. So 2022 I think we've been very vocal about how crowded the market was.
And it was and we had a couple of our long term several of our long term Lps and the first close we'll have a second close early in 2003 as I mentioned because people were just out of capacity in 2022 that was that is a common theme that we're hearing as well as we like the improvement we've seen.
And <unk> four over the last couple of years, we like the way op five looks and I think youll see hopefully more confidence build and again, that's a positive all.
All the changes we've made have been viewed as a positive with actual results how long we're going to be in the market. Technically you have 18 months from the first close so that could put you into Q1 of 2024 hour through Q1 of 2024.
I'm not sure, whether we will need that or not but that's that's sort of the.
Technical timeline, we have and it's just tough to know its tough to know what the fund raising environment will be in 2023, but the more quarters.
With <unk> four.
Stabilizing it.
A decent gross IRR or even sort of <unk>.
13, 14% and op five bookings, but hopefully that gives.
People the confidence that we're on the road tractor.
Okay.
If I could maybe sneak in one last question.
Just from a strategic perspective.
How much do you think about.
Being a traditional private equity now you got credit, but living to other asset classes, because when you have some.
I think some of your peers offer other types of.
Products in different asset classes, there, just whether or not that.
Our competitive advantage for them or not when thinking about.
The fundraising aspect in dealing with the Lps that you're doing.
Yeah. So look I think there is there is usually value and diversification. So we historically have done a private equity firm only.
In today's markets.
A lot of our credit product products are in really high demand. So we ought to be able to see some growth there as we look to the future strategically.
We're in the early stages of asking ourselves.
Else should we be competing in not only in credit and transportation as a form of <unk>, but are there other asset classes that we should think about that would create more enterprise value for on X again early innings, we could do that organically like we've done with Onyx transportation partners, obviously, given our our pristine balance.
We could do that inorganically as well, but I think it's too early to tell but I think the value of diversification in a market like this.
Is good and I think.
I like the fact that we're in credit and these other things.
Because it's just given us just kind of mutes any weakness that you might have in any product at any point in time.
Okay. Thank you.
Welcome.
Thank you and ask for a reminder, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.
One moment for our next question.
And our next question comes from the line of Graham Ryding from TD Securities. Your question. Please.
Hi.
Good afternoon.
I just wanted to start with.
I guess the change in the multi voting structure.
I think originally the terms where that.
A change in the CEO would trigger the collapse of the multi building structures. So why are you proposing to extend.
The voting and the board for another five years as opposed to just staying with the original terms.
Yeah, Hey, Graeme it's Chris Kevin again.
I think you've got to look at the transition as a whole.
And we believe that.
What we've done over the last two years and what we're proposing to do going forward.
It reflects a really well thought through transition for the company and puts it on the right path for growth going forward.
And believe that when you look at it together that what's being proposed.
As a positive change for the company and we believe shareholders are going to agree.
As I said, we're going to have lots of proactive discussions with our shareholders and the run up to an actual boat in may so im not going to go any further on specifics around the proposal on this call.
Okay understood.
On the on the PE fundraising side for your commitment.
For <unk> six $1 5 billion I think thats lower than your $2 billion commitment for <unk> should we be interpreting anything there in terms of.
The targeted size for this next one are you thinking it's going to be lower.
Okay.
Thanks.
So we've told our <unk> at our commitment will be between $1 $5 2 billion.
When we set the $1 five as the initial close we did that as a function of our liquidity and other things that we have going on internally at Onyx because we just wanted to make sure that we have plenty to fund.
Commitments as they come but you shouldnt read anything into that we've we've told you <unk> will be between 1 billion and $5 two and if our liquidity continues to be as good as I wouldn't be surprised if it is in this case.
Okay. So theres no you haven't actually put out a targeted size for <unk> overall.
Sorry, I missed that question.
You haven't established a targeted size for <unk> overall.
I don't know does that.
Okay.
I think where we sit today it needs to remain fluid just because I don't.
Don't know what 2023, we're going to look we're going to have a fund, but don't get me wrong.
Alex Partners is it going to have a fund we have a $7 billion balance sheet. Like this is a moment in time of a bumpy road in the fund raising environment, how big the fund is going to be relative to op.
It would be.
Wouldn't be fair to me to guess I think what we ought to do is each quarter to tell you how we're doing and as we get further into it to have an idea of the band of which high versus low and where we expect to come out and we will communicate that with you every quarter.
Okay.
Good.
Chris maybe Chris can you just give us an update or remind us sort of what to expect here in terms of the implications for run rate private equity fees as youre transitioning from.
First closes on op six on cap.
And then for your enduring funds.
Sure.
And I'll just I'll just focus on op because those numbers are a little bit more memorable for me, but happy offline take you through the math because I think you can sort of based upon our public disclosures kind of kind of do the math.
Easily but happy to take you through on cap offline, if you looked at LP.
<unk>.
With about 500 billion.
Excuse me $500 million.
Third party capital.
<unk> five if its investment period was to end today.
<unk> six was to go active.
Our run rate fee for private equity would temporarily be reduced annually by about call it $35 million.
Now as Bobby mentioned, we thought I think call it around 600 $650 million.
Capital remaining to invest in <unk>, so we're not expecting that to happen anytime real soon.
But that would be the impact if it was the kind of happened today with $500 million of third party capital in OA six now as a reminder.
<unk>.
As we complete subsequent closes in LP six as Bobby said potentially through early 2024.
All investors in the fund events do pay management fees back to the effective date of <unk>. So there will be just timing issue between what I kind of think of its economic management fee revenue and reported GAAP management pre revenue probably kind of over the next 15 months herself.
I don't know if that's answering your question, but again I don't have those numbers for on cap handy, but I can take you through that offline.
That's helpful. And then so what is the trigger then for your fees to move from.
<unk> five.
To move from sort of committed run rate to and invest it isn't just once you get that last investment.
That's right once we make the determination that essentially once we make the determination that we're now in the market hunting for an investment for <unk> as opposed to still looking for investments to closeout op five and so that's at least one investment away.
But potentially too.
Understood Okay.
And then my last question if I could just.
Maybe an update on the CLO side can you give us some commentary on.
And how you see that market performing I understand there's been some pullback broadly from sort of the industrial base given the volatile markets, but also the supply of loans.
It is lower given the lower activity. So maybe some commentary there please.
Our CLO portfolios.
Held up quite well.
But the new issuance is quite slow for the reason you just outlined there is just not a lot of M&A activity right now, particularly on the PE side.
The rates have risen quickly sort of the bias spread on new deals as cause volume to slow down, which obviously is directly correlated.
On the CLO side, but.
Again, the rising rates the assets liabilities that all seems to be working reasonably well right now and we'll continue to keep an eye on it but the distributions are coming in as normal as Chris mentioned and no red flags or as of now.
Great. That's it for me thank you.
Thank you this does.
This concludes the question and answer session of today's program I'd like to hand, the program back to Gerry Schwartz for any further remarks.
Thank you operator.
And thanks again to everyone for joining us today.
We really appreciate your continued support.
And we look forward to speaking with you again next quarter until then we wish everyone, a safe and joyous holiday season calculator.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.