Q2 2023 Onex Corporation Earnings Call

August 10, 2023

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Okay.

Welcome to Onyx second quarter, 2023 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.

One on your telephone keypad.

If you'd like to remove yourself from the queue simply press star one again.

Today's program is being recorded.

I will now turn the conference over to Joe how many <unk> managing director of shareholder Relations Communications dynamics.

Please go ahead.

Okay.

Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website hosting the call today are Bobby Le Blanc, Onyx, as Chief Executive Officer, and Chris Galvin, Our Chief Financial Officer.

Earlier. This morning, we issued our second quarter 2023 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 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 Bob.

Good morning, everyone.

<unk> had an active and productive three months.

Since our last earnings call, we monetize several investments.

Closed our first continuation vehicles.

Aggressively bought back shares.

And continue to make progress on cost management.

Despite ongoing challenges within the fund raising environment.

We are acting decisively on the priorities within our control.

Our balance sheet and liquidity position.

Competitive advantage.

Particularly in today's market conditions.

Our pro forma cash position currently stands at approximately $1 4 billion.

An increase of almost 30% since last quarter end.

We achieved this through a combination of targeted actions.

Hence our liquidity and produce DPI.

Our return of capital for our limited partners.

The sales of our so let's go shares returned total net proceeds of $275 million for Onyx shareholders.

While we enjoyed a long and productive relationship to.

The decision to act as consistent with our desire to be active managers of our own capital.

Similar to how we're approaching fund investing.

Our strong balance sheet and liquidity position affords us enhanced flexibility to invest and grow our business.

We continue to believe that one of the best investments, we can make right now as an investment in our own shares.

We know the value of our investing capital in the long term potential of our business.

After slowing our buyback program earlier this year.

We actively re entered the market in May and.

Our century purchased approximately one 6 million shares.

Notwithstanding the strong performance of our shares in Q2.

We continue to see our shares as materially underpriced relative to their intrinsic value.

I will now turn to some business updates starting with gluskin sheff.

By the end of July .

Had already transferred half of the Gluskin Sheff advisors to their new firms.

Many of our funds are not one fund serve a major accomplishment.

And we are processing over $700 million Canadian dollars of initial in-kind client transfers, meaning the funds will remain under Onyx management.

This number should ramp up in the coming months as more clients are transferred.

We continue to expect that all adviser and client transfers will be completed by the end of the year.

Okay.

All the teams involved are working hard to ensure a well managed transition theme.

The infrastructure, we have created and the service and marketing model. We are developing will continue to serve existing clients well.

And we will be flexible and scalable as we work to build out our platform.

You'll hear more about how we plan to do that on Investor day.

Across our platforms, our teams remain active creating opportunities where available despite the continued challenging environment.

At the end of June our CLO team priced our third U S. CLO this year.

Adding about $440 million of fee generating AUM.

Bringing the total raised from our CLO platform to nearly $1 $2 billion a share.

All the debt classes were oversubscribed.

And three of the 19 investors or new to the on X platform.

With our consistent performance and increasing marketing presence with overseas investors, we continue to achieve strong results and growing this business.

Both of our Falcon funds are actively fund raising.

For Falcon seven we have already closed on approximately a half of $1 billion of third party capital.

And the fund has begun investing.

Indirect lending our BDC continues to have very stable performance and.

And we expect to hold a closing of our Unlevered direct lending strategy. This fall.

Beyond cap team remains active with fund raising and has been successful in completing new investments in a tough market.

They recently completed a significant investment in <unk> merging it with our medical business of precision concepts.

Uncapped four portfolio company.

This creates a powerful platform to build future returns and generates DPI for uncapped for investors.

The investment in <unk> was the last platform investment for <unk>.

In the beginning of <unk> investing period.

In addition, the team recently completed an investment in a U S based provider of before and after school child care programs.

The ability to invest in high quality attractive opportunities and challenging deployment conditions is a testament to the uncap teams strong sourcing expertise.

We expect these.

These early investments for <unk>, five will resonate well with Lps as we continue fund raising.

Sure.

Recently, we talked about the potential of using continuation vehicles within private equity.

I am pleased to announce that at the end of July we closed our first CV.

On X partners for test sold its remaining investment in Ryan LLC to the CV.

Returning about $117 million to Onyx when funding occurs later this year.

On X partners has entered into a five year agreement to manage the CV.

Gaining approximately $600 million of fee generating AUM.

Across our organization, we continue to align our cost structure with our revenue expectations.

Leading to the restructuring charge in Q2 that we telegraphed last quarter.

The charge incorporates the changes previously announced within the Onyx partners platform.

As well as actions to streamline our corporate functions.

Our business units are being given more autonomy to determine the support they require and with that more accountability to drive profitability.

Although decisions that impact people are always tough.

This approach will lead to a more flexible model.

One that creates the right foundation.

For us to continue to grow.

Efforts to enhance efficiencies and reduce complexity across sonics will continue into the fall with.

With a particular focus on out of pocket spend.

As I look ahead, despite the still uncertain environment.

I see several bright spots on the horizon.

Our job right now.

One way we made good strides this quarter is to create certainty where we can by acting decisively.

We are focused on the job at hand, and executing with pace and discipline.

We will continue to update you on our progress and look forward to seeing many of you on September 28.

That I will turn it over to Chris.

Thanks, Bobby and good morning, everyone.

Our second quarter investing capital per share of $98 87.

This is up nearly 3% quarter on quarter and 9% in the last 12 months.

Canadian <unk>.

Invested capital was just shy of $131 per share up 12% year over year, which includes the impact of a stronger U S. Dollar.

We added to our liquidity in the quarter with realizations from Celestica and Ryan Specialty group.

Consequently, our cash and near cash position today is about $1 4 billion.

Representing 18% of our pro forma investing capital or roughly 23 Canadian dollars per share.

Given the strong capital position and the inherent value we see in our shares.

<unk> bought back one 6 million shares in the last few months, capturing about 95 million Canadian dollars apart.

For our continuing shareholders.

Looking at private equity.

In the second quarter, we saw broad based gains across the portfolio and in each of our core verticals other than consumer.

Direct investments were up 11% with more modest, 2% and 4% increases at op and on cap respectively.

Turning to credit.

On X recognized a $27 million gain or 4% return in Q2, driven by an increase in the fair value of CLO investments consistent with the returns and the underlying leverage loan market.

Overall performance remains strong across our credit funds in Q2.

Our team continues to capitalize them defensive positioning building its track record to attract new investors to the platform.

Our CLO has continued to deliver strong risk adjusted returns with below market default rates and strong equity distributions.

The CLO portfolios are also defensively positioned ranking in the top quartile in several risk based metrics, including exposure to loans rated triple C and to those trading below 80% of par.

Given the long term nature of on X as commitments to our investment platforms, it's useful to step back from the details of quarterly performance.

And when you do that over the last five years Onyx is invest in capital per share has enjoyed an 11% CAGR, which compares favorably to the MSCI world mid cap indexes, 6% return over the same timeframe.

Moreover, we generated those returns with relatively low volatility.

Investing capital per share has had a negative return in just one of the last 10 fiscal years.

Continuing to efficiently compound shareholder capital through our investment platforms will remain a key source of long term value creation at Onyx.

Now, let's turn to the asset management side of the business.

<unk> ended the quarter with $34 $3 billion of fee generating AUM substantially unchanged from year end.

Additions to FTA AUM, including our closed the bond cap five in April and several CLO. So far this year were substantially offset by some realization activity and net redemptions associated with gluskin transition.

In June we priced our third new U S. CLO of the year, which will add about $440 million to Q3 at G. AUM.

As Bobby mentioned, we recently agreed to sell Ryan LLC to a single asset continuation vehicle managed by <unk> partners.

This is our second realization event for Ryan the first being the sale of a minority stake in the back half of last year.

An exit share of the proceeds from the CV transaction will be about $117 million.

The transaction price reflected a modest discount to Ryan's most recent valuation.

This transaction and the previous partial sale were both done at a considerable markup to the evaluation prior to our launch of the sales process last year.

The CV transaction crystallizes at 25% gross IRR and a two seven times multiple of capital for Onyx.

We're really pleased with this outcome, providing about $250 million of distributions to our limited partners at a time when many are over allocated.

While allowing on X partners to increase and extend the duration of its fee generating AUM.

Run rate annual management fee should be a little over $3 million during the Cvs initial term and on X a lot of carry interest opportunity on about $600 million of AUM.

As Bobby mentioned, we're also pleased with the progress of the Gluskin Sheff transition.

As expected we saw some redemptions to cash in the first few months following the March announcement, which did have a negative impact on our fee generating AUM.

However, now that transferring coin capability has been extended to RBC clients.

We expect to see a ramp up of incline transfers, where we continue to manage the underlying assets.

The teams are working hard and.

And it's good to see the transition is occurring smoothly and on pace.

Turning to fee related and distributable earnings.

Onyx reported an overall FRE loss of $4 million in Q2, including $4 million of earnings from the asset management platform.

The improvement in Q2, FRE largely reflects the streamlining of the op team early in the quarter as well as cost being taken out of gluskin faster than the decline in management fees.

We expect this benefit of gluskin to begin narrowing in Q3 as lower management fees will be charged on assets transferred inclined to reflect the shift from wealth management.

Asset management services for these clients.

As I indicated last quarter with <unk> five committed fee periods slated to end late this year.

2023, FRE contribution will be relatively unaffected by the op six fundraising path.

However, there will be a meaningful step down in fees going into 2020 for which we are working to mitigate.

Both through changes to our cost structure.

And new fee, earning strategies, such as the Ryan continuation vehicle that leverage the Onyx partners team and its key long term relationships.

Looking at distributable earnings Q2 was relatively strong with $367 million a day driven by the partial realizations in select pickup and Ryan specialty group as well as regular quarterly CLO distributions.

<unk> ability to consistently generate day allows us to allocate capital and create value for shareholders.

In this case Q2 source resume regular stock buybacks and provide support to enhance the performance of our asset management platforms.

As indicated last quarter and as Bobby touched upon in his remarks, we've been conducting a comprehensive review of our operating cost structure.

This led to a restructuring charge of $15 million in Q2 associated with the on X partners platform and our corporate support groups.

The underlying changes will streamline our operations and align our cost structure for the current and anticipated operating environment.

The changes associated with this charge and some additional cost savings initiated earlier in the year will reduce our run rate expenses by a little over $25 million annually.

And to be clear those savings do not include the significant reduction in costs that will come from the wind down of our wealth management operations.

Our work to further optimize the business is ongoing with the next phase being focused on out of pocket spend.

We look forward to providing you a fulsome update on the business at our Investor Day on September 28, and hope to see you there.

That concludes the prepared remarks, so we'll now be happy to take any questions.

Certainly.

Once again, ladies and gentlemen, if you do have a question at this time. Please press star 111 moment for our first question.

And our first question comes from the line of Nik Priebe from CIBC capital markets. Your question. Please.

Okay. Thanks, So just on.

Your activity building balance sheet liquidity over the past few months.

I'm interested to hear a little bit more about.

The intended use of proceeds from those recent secondary sales.

I know you alluded to.

Recommencing buyback activity in the quarter.

With the proceeds be earmarked for anything else specific and I'd also be interested to hear what your appetite might be towards M&A in general.

Yes, so clearly I think as Bobby clearly share buybacks were top of mind, when we began to incur.

Increase our liquidity on the balance sheet.

Obviously warehousing.

Deals, we did that with <unk> you will see.

We invested $250 million in your last few deals Thats warehousing.

Many of those dollars for for Lps and for co invest.

Our Lps.

We're open to doing something that we will do something similar for on X transfer patient partners to give them a deal or two before they go out and commence fund raise we are looking we are thinking about some inorganic things as well they are not far enough along for me to share with you, but all of those types of things are the reason why you want good liquidity in this type of environment.

Okay.

Fair enough and then maybe just shifting over to Chris I think in your prepared remarks, you alluded to a meaningful step down.

In fees going into 2024 can.

Can you just elaborate on the source of that like my thinking was that fees would decline upon step down when a successor fund.

Fund has raised which obviously products partners won't be.

Anytime soon or if monetization activity accelerates in the capital is returned to Lp's. So what's the dynamic that's driving the step down.

In 2024, and can you just help us quantify the magnitude of that.

Sure Yes.

So as is typical I think in private equity funds the step down in fee comes at the earlier.

There's a successor fund beginning to draw fees or the end of the commitment period and in the case of <unk> five.

Five year commitment period comes to a close in November .

So at that point <unk> will move from.

Proximately 161, 7% of committed capital and you'll step down to 1% of invested capital.

So that's the step down Thats coming.

And we.

We gave you this number I think last quarter as well, where it's about $40 million in terms of annual fees.

That will see a step down.

Thanks.

Got it Okay. That's helpful. And then maybe my last question before I pass the line I just wanted to.

A point of clarification on Gluskin Sheff is.

Is there expected to be any FRE contribution from the investment management business that is staying with on X or is that just being wound down over time like I am just wondering if that's an area where you'll need to invest in.

Wholesaling capabilities to support that business or.

Is the overall spend expected to be relatively modest there.

Okay.

So we our goal is to make that asset that part of our asset management business profitable, we will be investing in wholesalers in the Canadian market.

Initially to make sure our products are being well understood within RBC and overtime other firms.

Federal wanted to distribute our products, so that we would need and want to make that into a profit center again, a lot of the legacy cost associated with gluskin are being unwound throughout the remainder of this year. The revenue line will decrease as the fees that we charge for our products go down in the retail.

But the cost structure is also going to go down and when you have those two things together, if we can begin to scale that.

That should be a profitable business over time is to go anywhere.

Okay very good that's it from me thanks.

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, I just wanted to follow up on that is I apologize if I missed it but.

Has there been any update in terms of.

The on X products that will go on to the RPC shelf and then any color on kind of the fee revenue structure. I know you mentioned kind of lower fees, but also lower expenses.

Yes so.

I think Chris mentioned this fund serve transfer allows our products to be transferred in kind into new accounts at RBC.

Another another.

It matters, a wealth manager across across Canada.

It takes operationally it takes some time to get those accounts opened they begin to open in July .

And the dollars that we were able to retain that percent was actually pretty good that we saw in July we'll have to watch that trend obviously for the rest of the year as more of these accounts are opened in the accounts.

<unk> have the option whether to stay with our products or our trade out of them, but so far they have been relatively sticky, which is which is good news.

Im sorry Im sorry.

Question.

So.

I think you kind of answered, but I guess is it all legacy alright.

Alright, so legacy, but all the quest can shaft funds, but also I was thinking also the on the credit partners.

Okay.

If those will stay there not liquid like some of the other plus can products. So there is not an opportunity to exit those products. They don't have a liquidity future until.

The investments are crystallized, but.

Those products are going over and staying in accounts as well.

Okay.

I had a question on the M&A side I know you mentioned nothing is far enough there, but would it be or I guess, how is the way to think about what you are looking at is it.

Potential.

Acquisitions that would add new skill sets.

To the business or.

Distribution or I'm, just trying to get a sense of directionally, what youre, what youre kind of looking at.

While we certainly could and may look at things that would.

Put us into new categories right now our focus is to try to.

Leverage our institutional knowledge, where we have long standing and really good reputations by industry I can't get any more specific than that but you ought to think about it as leveraging our expertise in areas that you would you would agree that we have a long standing.

Sure.

Powerful network, if you will.

Okay, and then if I could maybe ask one last question is.

And contacts.

It was a kind of a different investment when you initially made it kind of more earlier stage, but it had a very experienced management team that had failed insurance businesses from scratch before just wondering if theres an update in terms of how that investment is going.

Yes, the investments actually going.

Right well this will be the first year.

In the midst of our four here just the beginning of it.

That business and we'll see how the winter season goes in and what property damage might come but.

We're expecting our budgeting.

That business to do more than $400 million of net income this.

This year.

When you think about the book value that Roe.

It will be sort of mid teens, and we still haven't totally grown in.

To that cost structure in terms of our premium growth from this point forward. So we're actually really pleased with the performance of that business to date.

And again, we did that without leveraged so risk adjusted.

We're especially pleased so let's see how the wind season goes for the next few months, but.

This should be a very good year for cognex. The other thing that's benefiting convex is when we made the investment rates were essentially zero right. So our.

<unk> of dollars of invested assets are now, earning five 6% as the lower rate investments roll off and the higher roll in and that should double a on average portfolio, but youre going to really begin to see the benefit.

Investment income begin to come through the income statement that we haven't seen for the first three years and then finally the rate market.

In the property casualty specialty in particular continues to be a very hard market.

That means in layman's terms as we're getting paid to take on we're getting paid more money to take on the same unit of risk.

This year compared to last year, so all of those things together I'm quite optimistic about conflicts.

Okay perfect. Thank you.

Thank you one moment for our final question for today.

Yes.

And our final question for today comes from the line of Graham Ryding from TD Securities. Your question. Please.

Hi.

Good morning.

Maybe I could just start with you are quite active with some realizations in the quarter from.

Starting with your direct investments and then I guess post quarter some of your private investments.

Should we see.

Still expect you to be to try to be quite active particularly on the on the private investment side from some of those op.

Portfolio investments to try and show your LP investors evidence of performance and value behind that now or is that still.

Part of your focus.

I guess to sort of the near term.

Yes, it is definitely.

Our focus.

Can't get into anything specific but.

Our LP base has made it clear that DPI is important to them right now Chris mentioned in his comments.

The weighting of pay for a lot of our institutional partners.

As overweight.

We're trying to help for ways to fix that.

But again.

You shouldn't view that as panicked creation of Epi, we're doing it very thoughtfully.

And it'll be it'll be not only thoughtful in terms of when and how but relative to our March.

Okay understood.

And I.

I think you said cash levels are at $1 $4 billion does that include some of the.

The proceeds that you've realized from Ryan LLC et cetera, and should we expect you to continue to be active.

With buybacks at that level of cash.

Yes that $1 4 billion brand Thats.

Pro forma for the.

Post quarter end activity and including the final sale of selected guidance in normal course issuer bid buying.

I would say that at $1 4 billion of cash and where our stock trades.

We're still looking to be active.

And you should expect that.

Okay great.

Sure.

On the gluskin piece.

Like you've moved some assets over to fund centered on since July .

If you gave us a percentage I apologize I think I missed it but.

How much of those assets have you been able to retain after they've shifted over to the funds are structured.

Yes. So in July there was a total movement.

Just under.

900 million with $700 million of that being assets. We retained so those are transfers and kind, where we're now the asset manager for RBC clients and continue to earn fees.

So that's a great.

That's a good number obviously, but remember that's just the first month.

Really follow that closely for the next five months.

Understood and then there'll be some remaining assets and still need to be shifted over I guess, because there's I think there's like $5 1 billion.

Total AUM with a gluskin.

Yes, we think it's going to sort of happen.

About a month by month basis as clients make decisions around where they want to take their business going forward, what wealth management firm they want to take their business to you and then also as part of that decision will be whether to retain gluskin sheff managed funds or not so it'll be a month by month process with clients every client sort of on a different timeline I think in terms of.

Their decision making.

Understood.

Just to be clear is whether the clients want to retain.

Our products not whether we want to continue to manufacture a product we definitely want to continue to manufacture our products.

Understood. Okay, and then any any sort of progress with your with RBC in terms of.

Agreement or a partnership to distribute your private credit private credit strategy has done that.

Yes, we're working on that real time with them. The partnership has been a good one so far.

I have been dealing with a gentleman named Dave Agnew day to day.

On that topic and he's been he's been in the whole firm has been an excellent partner so far so I'm optimistic that those products will be coming on the shelf within due course as well.

Okay understood and then my last question if I could.

Yes.

You gave some color on the fundraising could you just sort of recap what the plan is and what the status is for on cap.

Thanks Transportation.

Fund and then not just credit.

Should we be looking for what you're targeting in terms of fundraising.

So for on X transportation partners.

Formally launched fund raising we're doing pre meetings until.

We have at least one deal warehouse that that'll be sort of proof of concept for that team and we do have some opportunities that are are.

Relatively far along there, but I don't think you should expect to see fundraising until you see that a first deal close.

On cap.

We will likely be in market through Q1.

Of next year.

Again, even with the track record of a non cap or Falcon.

Which are both extraordinary track record just a slower fundraising environment Theres just no. There's just no question about it so the time that is taking us.

To raise the $1.

There is much longer than were used to probably think two X maybe maybe even more in the case of <unk>. They raise money really quickly in the past. So you should expect it to be more measured and more slow, but they are making progress in closing new dollars.

Can you just sort of in the same situation as uncapped I believe their fundraising goes through Q1, maybe even a little bit into Q2 of next year.

Again, they have a large anchor LP from for that fund already.

That is helpful and raising the rest of the of the outside dollars, but again slower than they used to but remember their last two funds are top quartile.

And where that product fits in sort of a.

Risk adjusted.

They are they are able to attract.

Or underwrite sort of 16, 17%.

Returns only six seven times through our capital structure and when you look at senior credit trading at 10 or 11, Thats a pretty good premium for the next turn return on that.

And that's.

That's the story that I think will ultimately resonate with that fund.

Great. That's the mezzanine fund, you're referring to there, yes, sorry, yes, yes.

Thanks, that's good for me.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Bobby Le Blanc for any further remarks.

Thanks for joining us today and for the questions. If you have any follow up questions feel free to call Jill or any one of us and I hope you enjoy the rest of your summer.

Thanks see you in September .

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Okay.

Thanks, Jonathan.

<unk>.

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Welcome to <unk> second quarter, 2023 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 key.

Pat.

If you'd like to remove yourself from the queue simply press Star One again as a reminder, today's program is being recorded.

I will now turn the conference over to Joe <unk>, managing director of shareholder Relations and communications dynamics. Please.

Please go ahead.

Okay.

Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website hosting the call today are Bobby Le Blanc on exits Chief Executive Officer, and Chris Galvin, Our Chief Financial Officer earlier. This morning, we issued our second quarter 2023 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.

With that I'll now turn the call over to Bobby.

Good morning, everyone.

<unk> had an active and productive three months.

Since our last earnings call, we monetize several investments.

Close our first continuation vehicle.

Aggressively bought back shares.

And continue to make progress on cost management.

Despite ongoing challenges within the fund raising environment.

We are acting decisively on the priorities within our control.

Our balance sheet and liquidity position.

Imperative advantage.

Particularly in today's market conditions.

Our pro forma cash position currently stands at approximately $1 4 billion.

An increase of almost 30% since last quarter end.

We achieved this through a combination of targeted actions.

First our liquidity and produce DPI.

Our return of capital for our limited partners.

The sales of our solicitor shares returned total net proceeds of $275 million for Onyx shareholders.

While we enjoyed a long and productive relationship to.

The decision to act as consistent with our desire to be active managers of our own capital.

Similar to our approaching fund investing.

Our strong balance sheet and liquidity position affords us enhanced flexibility to invest and grow our business.

We continue to believe that one of the best investments, we can make right now as an investment in our own shares.

We know the value of our investing capital in the long term potential of our business.

After slowing our buyback program earlier this year.

We actively re entered the market in May.

<unk> century purchased approximately one 6 million shares.

Notwithstanding the strong performance of our shares in Q2.

We continue to see our shares as materially underpriced relative to their intrinsic value.

I will now turn to some business updates starting with gluskin sheff.

By the end of July .

We had already transferred half of the Gluskin Sheff advisors to their new firms.

Many of our funds are now one fund serve a major accomplishment.

And we are processing over $700 million Canadian dollars of initial in-kind client transfers, meaning the funds will remain under Onyx management.

This number should ramp up in the coming months.

As more clients are transferred.

We continue to expect that all adviser and client transfers will be completed by the end of the year.

Okay.

All the teams involved are working hard to ensure a well managed transition being.

The infrastructure, we have created and the service and marketing model. We are developing will continue to serve existing clients well.

And we will be flexible and scalable as we work to build out our platform.

You'll hear more about how we plan to do that on Investor day.

Across our platforms, our teams remain active creating opportunities where available despite the continued challenging environment.

At the end of June our CLO team priced our third U S. CLO this year.

Adding about $440 million of fee generating AUM.

Bringing the total raised from our CLO platform to nearly $1 $2 billion. This year.

All of the debt classes were oversubscribed.

And three of the 19 investors or new to the on X platform.

With our consistent performance and increasing marketing presence with overseas investors, we continue to achieve strong results and growing this business.

Both of our Falcon funds are actively fund raising.

For Falcon seven.

<unk> already closed on approximately a $5 billion of third party capital.

And the fund has begun investing.

Indirect lending our BDC continues to have very stable performance and.

And we expect to hold a closing of our Unlevered direct lending strategy. This fall.

Beyond cap team remains active with fund raising and has been successful in completing new investments in a tough market.

They recently completed a significant investment and biometrics merging it with the medical business of precision concepts.

<unk> four portfolio company.

This creates a powerful platform to build future returns and generates DPI for uncapped for investors.

The investment in <unk> was the <unk>.

Last platform investment for <unk>.

And at the beginning of <unk> investment period.

In addition, the team recently completed an investment in a U S based provider of before and after school child care programs.

The ability to invest in high quality attractive opportunities and challenging deployment conditions is a testament to the on cap teams strong sourcing expertise.

We expect these.

These early investments for <unk>, five will resonate well with Lps as we continue fund raising.

Sure.

Recently, we talked about the potential of using continuation vehicles within private equity.

I am pleased to announce that at the end of July we closed our first CV.

Onyx partners for <unk> remaining investment in Ryan LLC to the CV.

Returning about $117 million to Onyx when funding occurs later this year.

Alex Partners has entered into a five year agreement to manage the CV.

<unk> approximately $600 million of fee generating AUM.

Across our organization, we continue to align our cost structure with our revenue expectations.

Leading to the restructuring charge in Q2 that we telegraphed last quarter.

The charge incorporates the changes previously announced within the Onyx partners platform.

As well as actions to streamline our corporate functions.

Our business units are being given more autonomy to determine the support they require and with that more accountability to drive profitability.

Although decisions that impact people are always tough.

This approach will lead to a more flexible model.

One that creates the right foundation.

For us to continue to grow.

At first to enhance efficiencies and reduce complexity across science will continue into the fall with.

With a particular focus on out of pocket spend.

As I look ahead.

Despite the still uncertain environment.

I see several bright spots on the horizon.

Our job right now.

One way we made good strides this quarter is to create certainty where we can by acting decisively.

We are focused on the job at hand, and executing with pace and discipline.

We'll continue to update you on our progress and look forward to seeing many of you on September 28.

With that I'll turn it over to Chris.

Thanks, Bobby and good morning, everyone.

Our second quarter investing capital per share of $98 87.

This is up nearly 3% quarter on quarter and 9% in the last 12 months.

Canadian dollars investing capital was just shy of $131 per share up 12% year over year, which includes the impact of a stronger U S. Dollar.

We added to our liquidity in the quarter with realizations from Celestica and Ryan Specialty group.

Consequently, our cash and near cash position today is about $1 4 billion.

Representing 18% of our pro forma investing capital or roughly 23 Canadian dollars per share.

Given the strong capital position and the inherent value we see in our shares.

<unk> bought back one 6 million shares in the last few months, capturing about 95 million Canadian dollars are harder.

For our continuing shareholders.

Looking at private equity.

In the second quarter, we saw broad based gains across the portfolio and in each of our core verticals other than consumer.

Direct investments were up 11% with more modest two 4% increases at op and on cap respectively.

Turning to credit.

Onyx recognized a $27 million gain or 4% return in Q2, driven by an increase in the fair value of CLO investment consistent with the returns and the underlying leverage loan market.

Overall performance remains strong across our credit funds in Q2.

Our team continues to capitalize on defensive positioning building its track record to attract new investors to the platform.

Our CLO has continued to deliver strong risk adjusted returns with below market default rates and strong equity distributions.

The CLO portfolios are also defensively position ranking in the top quartile in several risk based metrics, including exposure to loans rated triple C and to those trading below 80% of par.

Given the long term nature of on X as commitments to our investment platforms, it's useful to step back from the details our quarterly performance.

Moreover, we generated those returns with relatively low volatility.

Best in capital per share has had a negative return in just one of the last 10 fiscal years.

Continuing to efficiently compound shareholder capital through our investment platforms will remain a key source of long term value creation at Onyx.

Now, let's turn to the asset management side of the business.

<unk> ended the quarter with $34 $3 billion of fee generating AUM substantially unchanged from year end.

Additions to <unk>, including a closed the bond cap five in April and several CLO. So far this year were substantially offset by some realization activity and net redemptions associated with glass can transition.

In June we priced our third new U S. CLO of the year, which will add about $440 million to Q3 FTE AUM.

As Bobby mentioned, we recently agreed to sell Ryan LLC to a single asset continuation vehicle managed by <unk> partners.

This is our second realization event for Ryan the first being the sale of a minority stake in the back half of last year.

Honestly share of the proceeds from the CV transaction will be about $117 million.

The transaction price reflected a modest discount to Ryan's most recent valuation.

This transaction and the previous partial sale were both done at a considerable markup to the evaluation prior to our launch of the sales process last year.

The CV transaction crystallizes, a 25% gross IRR and a two seven times multiple of capital for on X.

We're really pleased with this outcome, providing about $250 million of distributions to our limited partners at a time when many are over allocated.

While allowing onyx partners to increase and extend the duration of its fee generating AUM.

Run rate annual management fee should be a little over $3 million during the Cvs initial term and Onyx will have a carry interest opportunity on about $600 million of AUM.

And Bobby mentioned, we're also pleased with the progress of the Gluskin Sheff transition.

As expected we saw some redemptions to cash in the first few months following the March announcement, which did have a negative impact on our fee generating AUM.

However, now that transferring coin capability has been extended to RBC clients.

We expect to see a ramp up of in client transfers, where we continue to manage the underlying assets.

The teams are working hard and.

And it's good to see the transition is occurring smoothly and on pace.

Turning to fee related and distributable earnings.

Onyx reported an overall FRE loss of $4 million in Q2, including $4 million of earnings from the asset management platform.

The improvement in Q2, FRE largely reflects the streamlining of the op team early in the quarter as well as cost being taken out of gluskin faster than the decline in management fees.

We expect this benefit of gluskin to begin narrowing in Q3 as lower management fees will be charged on assets transferred inclined to reflect the shift from wealth management to.

Asset management services for these clients.

As I indicated last quarter with <unk> five committed see periods slated to end late this year.

<unk> 2023, FRE contribution will be relatively unaffected by the <unk> six fundraising path.

However, there will be a meaningful step down in fees going into 2020 for which we are working to mitigate.

Both through changes to our cost structure.

And new fee, earning strategies, such as the Ryan continuation vehicle that leverage the Onyx partners team and its key long term relationships.

Looking at distributable earnings Q2 was relatively strong with $367 million a day driven by the partial realizations and Celestica and Ryan specialty group as well as regular quarterly CLO distributions.

<unk> ability to consistently generate day allows us to allocate capital and create value for shareholders.

In this case Q2 source resume regular stock buybacks and provide support to enhance the performance of our asset management platforms.

As indicated last quarter and as Bobby touched upon in his remarks, we've been conducting a comprehensive review of our operating cost structure.

This led to a restructuring charge of $15 million in Q2.

With the on X partners platform.

Our corporate support groups.

The underlying changes will streamline our operations and align our cost structure for the current and anticipated operating environment.

The changes associated with this charge and some additional cost savings initiated earlier in the year.

Reduce our run rate expenses by a little over $25 million annually.

And to be clear those savings do not include the significant reduction in costs that will come from the wind down of our wealth management operations.

Our work to further optimize the business is ongoing with the next page being focused on out of pocket spend.

We look forward to providing you a fulsome update on the business at our Investor Day on September 28, and hope to see you there.

That concludes the prepared remarks, so we'll now be happy to take any questions.

Certainly.

Once again, ladies and gentlemen, if you do have a question at this time. Please press star 111 moment for our first question.

And our first question comes from the line of Nik Priebe from CIBC capital markets. Your question. Please.

Okay. Thanks, So just on.

Your activity building balance sheet liquidity over the past few months.

I'm interested to hear a little bit more about.

The intended use of proceeds from those recent secondary sales.

I know you alluded to.

Commencing buyback activity in the quarter.

With the proceeds be earmarked for anything else specific and I'd also be interested to hear what your appetite might be towards M&A in general.

Yes, so clearly I think as Bobby clearly share buybacks were top of mind, when we began to incur.

Increase our liquidity on the balance sheet. There is obviously warehousing of deals we did that with uncapped youll see.

We invested $250 million in your last few deals Thats warehousing.

Many of those dollars for for Lps and for co invest.

Our Lps and we're open to doing something that we will do something similar for on X transferred patient partners to give them a deal or two before they go out and commenced fund raise we are looking we are thinking about some inorganic things as well theyre not far enough along for me to share with you, but all of those types of things are the reason why you want good liquidity in this type of environment.

Okay.

Fair enough and then maybe just shifting over to Chris I think in your prepared remarks, you alluded to a meaningful step down.

In fees going into 2024.

Can you just elaborate on the source of that like my thinking was that fees would decline upon step down when a successor.

Fund has raised which obviously from onex partners won't be.

Anytime soon or if monetization activity accelerates in the capital is returned to Lp's. So what's the dynamic that's driving the step down.

In 2024, and could you just help us quantify the magnitude of that.

Sure Yes.

So as is typical I think in private equity funds the step down in fee comes at the earlier.

There's a successor fund beginning to draw fees or the end of the commitment period and in the.

<unk> <unk> five.

Five year commitment period comes to a close in November .

And so at that point <unk> will move from.

Approximately 161, 7% of committed capital and it will step down to 1% of invested capital.

So that's the step down that's coming.

And we.

We gave you this number I think last quarter as well, it's about $40 million in terms of annual fees.

That will see a step down at that point.

Got it Okay. That's helpful. And then maybe my last question before I pass the line I just wanted to.

Point of clarification on Gluskin sheff.

Is there expected to be any FRE contribution from the investment management business that is staying with on X or is that just being wound down over time I'm. Just wondering if that's an area where you'll need to invest in.

Wholesaling capabilities to support that business or.

Is the overall spend expected to be relatively modest there.

Okay.

So we our goal is to make that asset that part of our asset management business profitable, we will be investing in wholesalers in the Canadian market.

Initially to make sure our products are being well understood within RBC.

Over time other firms.

<unk> wanted to distribute our products, so that we would need and want to make that into a profit center again, a lot of the legacy cost associated with gluskin are being unwound throughout the remainder of this year. The revenue line will decrease as the fees that we charge for our products go down in the retail market.

But the cost structure is also going to go down and when you have those two things together. If we can begin to scale that that should be a profitable business over time is to go anywhere.

Okay very good that's it from me thanks.

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, I just wanted to follow up on that is I apologize if I missed it.

Has there been any update in terms of the.

<unk> on X products that will go on to the RPC shelf and then any color on kind of the fee revenue structure. I know you mentioned kind of lower fees, but also that much longer.

Expenses.

Yes so.

Yes.

Chris mentioned this fund serve transfer allows our products to be transferred in kind into new accounts at RBC.

Another another.

What matters is wealth managers across across Canada.

It takes operationally it takes some time to get those accounts open they begin to open in July .

<unk> have the option whether to stay with our products or our trade out of them, but so far they have been relatively sticky, which is which is good news.

I'm, sorry, I'm sorry.

Question.

So.

I think you kind of answered, but I guess is it all a good legacy clients.

Alright, so legacy, but all the quest can sheff funds, but also I was thinking also the on the credit partners.

Okay.

If those will stay there not liquid.

Some of the other plus can products. So there is not an opportunity to exit those products. They don't have a liquidity future until.

The investments are crystallized, but those products are going over and saying and accounts as well.

Okay.

I had a question on the M&A side I know you mentioned nothing is far enough there, but would it be or I guess, how is the way to think about what you are looking at is it.

Potential.

Acquisitions that would add new skill sets.

To the business or distribution or I'm, just trying to get a sense of directionally about what you're kind of looking at.

While we certainly could and may look at things that would.

Put us into new categories right now our focus is to try to.

You would agree that we have a longstanding and.

Sure.

Powerful network, if you will.

Okay, and then if I could maybe ask one last question is.

Contacts.

Yes, the investment is actually going quite well this will be the first year.

We're in the midst of our four here just the beginning of it and with that business and look we'll see how the winter season goes in and what property damage might come but.

We're expecting our budgeting.

That business to do more than $400 million of net income this.

This year.

When you think about the book value that Roe.

It will be sort of mid teens, and we still haven't totally grown in.

To that cost structure in terms of our premium growth from this point forward. So we're actually really pleased with the performance of that business to date.

And again, we did that without leverage so risk adjusted.

We're especially for you so let's see how the wind season goes for the next few months, but.

This should be a very good year for contracts. The other thing that's benefiting convex is when we made the investment rates were essentially zero right. So our billions of dollars of invested assets are now, earning five 6% as the lower rate investments roll off and the higher roll in and there is a double a on average.

Portfolio, but youre going to really begin to see the benefit of.

<unk> investment income begin to come through the income statement that you we haven't seen for the first three years and then finally the rate market.

In the property casualty specialty in particular continues to be a very hard market.

That means in layman's terms as we're getting paid to take on we're getting paid more money to take on the same unit of risk.

This year compared to last year, so all of those things together I'm quite optimistic about conflicts.

Okay perfect. Thank you.

Thank you one moment for our final question for today.

And our final question for today comes from the line of Graham Ryding from TD Securities. Your question. Please.

Hi.

Good morning.

Maybe I could just start with you were quite active with some realizations in the quarter from.

Yes, starting with your direct investments and then I guess post quarter some of your private investments.

Should we.

Still expect you to be to try to be quite active particularly on the on the private investment side from some of those op.

Portfolio investments to try and show your LP investors evidence of performance and value behind that now or is that still.

Part of your focus.

I guess sort of the near term.

Yes, it is definitely.

Our focus.

Can't get into anything specific but.

L. P basis has made it clear that <unk> is important to them right now Chris mentioned in his comments.

The weighting of pay for a lot of our institutional partners.

As overweight.

We're trying to help for ways to fix that.

But again.

You Shouldnt view that as panicked creation of Epi, we're doing it very thoughtfully.

And it'll be it'll be not only thoughtful in terms of when and how but relative to our March.

Okay understood.

And I think you said.

Cash levels are at one 4 billion, but does that include some of the.

The proceeds that you realize from Ryan LLC et cetera.

Should we expect you to continue to be active.

With buybacks at that level of cash.

Yes that $1 4 billion Graham, it's Chris is pro forma for the.

Post quarter end activity and including the final sale of Celestica and some normal course issuer bid buying.

And yes, I would say.

At $1 4 billion of cash and where our stock trades.

We're still looking to be active.

And you should expect that.

Okay great.

<unk>.

On the gluskin piece.

Sounds like you've moved some assets over to fund surrounds in July .

If you gave us a percentage I apologize I think I missed it but how much of those assets that you've been able to retain after they've shifted over to the fund structure.

Yes. So in July there was a <unk>.

Total movement.

Just under.

900 million with $700 million of that being assets. We retained so those are transfers and kind, where we're now the asset manager.

Our RBC clients and continue to earn fees.

Great.

Good number obviously, but remember that's just the first month, we had a really follow that closely for the next five months.

Understood and then there'll be some remaining absence and still need to be shifted over I guess, because there's I think there's like $5 1 billion.

Total AUM with a gluskin.

Yes, we think it's going to sort of happen sort of on a month by month basis as clients make decisions around.

Where they want to take their business going forward, what wealth management firm. They wanted to take their business to you and then also as part of that decision will be whether to retain gluskin sheff managed funds or not so it'll be a month by month process with clients every client sort of on a different timeline I think in terms of their decision making.

And just to understand the decline just to be clear is whether the clients want to retain.

Our product is not whether we want to continue to manufacture our product we definitely want to continue to manufacture our products.

Understood. Okay, and then any any sort of progress with your with RBC in terms of.

Agreement or a partnership to distribute your private credit private credit strategy has done that through their Paul yes.

Yes, we're working on that real time with them. The partnership has been a good one so far.

I've been dealing with a gentleman named Dave Agnew day to day.

On that topic.

He has been he has been in the oilfield has been an excellent partner so far so I'm optimistic.

Those products will be coming on the shelf within due course as well.

Okay.

And then my last question if I could.

You gave some color on the fundraising could you just sort of recap what the plan is and what the status is for on cap.

Ron.

Thanks Transportation.

Fund and then just credit what should we be looking for what you're targeting in terms of fundraising.

So for on X transportation partners.

We won't formally launch fund raising we're doing pre meetings right until we have at least one deal warehouse that will that will be sort of proof of concept for that team and we do have some opportunities that are are.

Relatively far along there, but I don't think you should expect to see fundraising until you see that a first deal close.

On cap.

We will likely be in market through Q1.

Next year.

Again, even with the track record of a non cap or Falcon.

Which are both extraordinary track record just a slower fundraising environment Theres just no.

No question about it so that the time that is taking us.

To raise the $1 has is much longer than were used to probably think two X maybe maybe even more in the case of <unk>. They raise money really quickly in the past. So you should expect it to be more measured and more slow, but they are making progress and closing on new dollars.

All kinds of sort of in the same situation is on cap I believe their fundraising goes through Q1, maybe even a little bit into Q2 of next year.

Again, they have a large anchor LP from for that fund already.

That is helpful and raising the rest of the of the outside dollars, but again slower than their use of but remember their last two funds are top quartile and and where that product fits in sort of a.

Risk adjusted.

They are they are able to attract.

Or underwrite sort of 16, 17%.

Returns only six seven times through our capital structure and when you look our senior credit trading at 10 or 11, Thats a pretty good premium for the next turn of return on that.

And that's.

That's the story that I think will ultimately resonate with that fund.

Great. That's the mezzanine fund, you're referring to there, yes, sorry, yes, yes.

Thanks, that's good for me.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Bobby Le Blanc for any further remarks.

Thanks for joining us today and for the questions. If you have any follow up questions feel free to call Jill or any one of us and I hope you enjoy the rest of your summer.

See you in September .

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

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