Q3 2023 Onex Corp Earnings Call
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Welcome to Onyx third 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 keypad.
As a reminder, this conference is being recorded.
Now I'll turn the call over to Jill how many managing director shareholder relations and communication at Onyx. Please go ahead.
Yeah.
Yeah.
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 third 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 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.
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 Bobby.
Good morning, everyone.
Honest delivered a solid Q3.
And continuing to build shareholder value with investing capital per share.
4% over the last three months and 15% over last year.
The team remains focused on the value creation plan, we presented at Investor Day.
And we are making progress on strategic initiatives across our platforms.
As I mentioned at Investor Day, we are ramping up our sales and marketing functions to support our businesses and achieving their fundraising objectives.
I am pleased to announce that we've hired a new leader for our client and product solutions group and he is expected to join us in early 2024.
I look forward to more formally introducing him once his garden leave is completed.
In the meantime, I can tell you that he brings extensive experience in fund raising and distribution along with strong LP relationships and will bring a new perspective to our already talented team.
I know he is very excited about joining onyx.
Emma Thompson, who has provided many years of leadership for on X and the Cps team worked closely with him to fully leverage the opportunities ahead.
In private equity Onyx.
Onyx partners five announced an agreement to acquire credit.
Specialty insurance business from our <unk> insurance holdings.
Our extensive knowledge of the insurance industry.
Together with our expertise in complex carve outs was a major contributor to securing this transaction.
We expect to close sometime in the first half of 2024 subject to customary approvals and closing conditions, including <unk> shareholder approval.
We still have room for one more investment in <unk> similar in size to our creditors and the team is working hard to secure a good opportunity before the conclusion of the funds investment period later this month.
Earlier this week, we announced the successful realization of ASM global.
A business that was significantly impacted by the pandemic yet recovered incredibly well.
The transaction was completed duration consistent with our current mark and achieve a two times multiple of capital.
Another significant step forward in providing valuable DPI, a return of capital to our op for investors.
In credit we issued one U S and one euro CLO in Q3.
And just last week price, our second euro CLO of the year, which will bring the total raise from our platform to more than $1 8 billion. This year.
The team remains confident in our ability to continue to issue Clo's amid strong investor demand.
And our private wealth business.
The team is making good progress on the transition to our new sales and distribution model.
In addition to our private credit and equity products. There are good products across the legacy Clos can share platform that we believe will be competitive and attractive to clients and advisors.
We expect to be in a position to actively market our funds to new advisers and clients in the new year.
Profitability was a core message at our Investor day, and we intend to be strategic and pragmatic in how we evolve and grow this platform.
In that vein, we have made the tough but necessary decision to wind down the Blair Franklin Fund.
This comes after careful consideration and following changes with the investment team.
Blair Franklin surplus and chef and clients well over time.
But the recent changes led us to conclude that we no longer see a viable future for this fund.
We have notified clients and are working to ensure a smooth and responsible wind down.
The remaining legacy funds are a part of our go forward plan.
The focus will be on adding new fee generating AUM to ensure these strategies contribute to <unk> overall profitability within a reasonable timeframe.
We will continue to update you over the coming quarters.
Our firm wide cost management program began in earnest in the spring accelerated over the summer and will continue to deliver benefits into the new year.
The result of the actions we've already taken can be seen in our Q3 financials.
Where we achieved both positive asset management and total fee related earnings.
The impact is reflected across our expense lines and although FRE will be more challenged in future quarters, you can expect to expense management to contribute to more consistent and positive FRE over time.
Finally, we continue to actively buyback onyx shares over the last three months reinforcing our belief in the underlying value of our business relative to the significant discount embedded in our stock price.
As of the end of October we have bought back three 5 million shares under our current normal course issuer bid and we still have about three 2 million shares of capacity remaining on the CIB.
We will continue to take advantage of the buyback opportunity Jeff.
<unk> meaningful value for our shareholders.
Achieving the objectives, we laid out at Investor day will require focus hard work and.
Willingness to act quickly and make tough decisions when necessary.
Our team is committed to doing what it takes to deliver value for our shareholders.
We will continue to proactively communicate our progress.
I appreciate the support of our shareholders as we work to drive increased value in the years ahead.
I'll now turn it over to Chris.
Thanks, Bobby and good morning, everyone.
Our third quarter investing capital per share of $103 19.
Is up nearly 4% quarter on quarter and 15% in the last 12 months.
In Canadian dollars investing capital was just shy of 140 per share up 13% year over year.
We ended the quarter with cash and near cash of $1 5 billion.
Representing 19% of investing capital.
Our near cash now includes the proceeds we expect to receive later in Q4 from the Ryan continuation vehicle closed during Q3.
Looking forward liquidity is expected to remain strong with the announced realization of ASM <unk> for more than offsetting an exit share of <unk> investment.
<unk> early next year.
We also expect a return of capital associated with on cap five first two investments as additional capital is raised for that fund.
Given the strong capital position and our share price trading at what we see at a material discount to intrinsic value.
<unk> repurchased two 6 million shares since the end of June.
Year to date, we've captured about 220 million Canadian dollars of hard NAV for our continuing.
<unk> shareholders through share repurchases.
Looking at private equity.
Our PE portfolio delivered a solid third quarter with the overall portfolio up 4%, which compares to the S&P 500, and MSCI World mid cap indices, both off about 4%.
The Onyx partners in on cap portfolios, both contributed in Q3 with our direct investments, having a particularly strong quarter up 17%.
Turning to credit investing.
Overall performance remains strong across our credit funds with a $44 million net gain or 6% return on on X as credit investments in Q3.
This was driven by increase in the fair value of CLO investments.
<unk> with returns and the underlying leverage loan market.
Now, let's turn to the asset management side of the business.
<unk> ended the quarter with $34 2 billion of fee generating AUM essentially unchanged from Q2.
<unk> AUM in the quarter benefited from the close of the Ryan continuation vehicle, which combined with two new CLO.
Added nearly $1 $3 billion of FCA.
We also recently priced our next European CLO and expect that deal to add to AUM before year end.
These additions were offset by net outflows from liquid strategies tied to the wind down of the gluskin Sheff wealth management business.
At the end of October we had about Canadian $5 $2 billion managed for private wealth clients.
Approximately Canadian 1 billion of that was held in the Blair Franklin Fund, which as Bobby explained will wind down by the end of the year.
Of the remaining Canadian $4 2 billion to 3 billion has already been transferred inclined or has invested in closed end alternative products such that we continue to earn fees on AUM.
On a go forward basis.
But it's very difficult to predict how the Canadian one $9 billion balance will unfold as between transfers inclined and redemptions.
As one data point in October approximately 50% of gluskin sheff client departures or via transfers inclined with the rest being redeemed.
We're continuing to work towards a smooth transition for our remaining wealth management clients and establishing a strong foundation for growing private capital AUM going forward.
Turning to fee related and distributable earnings.
As Bobby said, we're starting to see the benefit of our cost reduction efforts with total FRE of $8 million in Q3, including $13 million from the asset management platforms.
The improvement in Q3 reflects lower compensation and other costs, resulting from our restructuring and efficiency efforts.
Discussed at Investor Day in September.
We believe that over three quarters of the estimated $40 million of cost saving opportunities are now reflected in FRE.
We continue to advance phase two of our initiative with a zero based budgeting approach focused on hard costs.
We expect run rate costs will continue to decline as further opportunities are executed and are reflected in our results.
As I've discussed several times run rate management fees will drop by approximately $40 million when OPEC five exit its commitment period later this month.
We expect some of that decline to be offset by the changes to our cost structure and fees on new capital raised.
In 2024, we expect to add new FTA AUM for on <unk>, five and our first transportation client.
And we're also exploring additional FTA AUM opportunities to offset the expected decline in fees.
As outlined at Investor Day.
If we reach our targets for on <unk>, five and the Transportation Fund you should only take.
$500 million to $600 million of FGA AUM for <unk> to reach breakeven next year.
Our credit run rate management fees were $118 million a quarter and the.
The decrease reflects the new fee structure within our private wealth strategy, which is now focused on third party distribution.
As we previously mentioned substantially all of the decrease in revenues is offset by the lower cost of our distribution strategy.
However, we can expect the wind down of the Blair Franklin Fund and additional redemptions by private wealth clients to be a headwind in the near term.
Looking at distributable earnings Q3 was a relatively strong quarter with $223 million of GE driven by PE realizations.
Finally, an update on on X is carried interest opportunity we.
<unk> ended the quarter with $240 million of unrealized carried interest up $29 million from Q2.
The majority of this increase was driven by net gains within op five.
As a reminder, onyx has about $28 billion of private equity and credit.
AUM subject to carry.
All in all it was a solid quarter and we continue to see early progress on the objectives, we outlined at Investor day.
Compounding <unk> investing capital per share we will continue to be the most significant source of value creation over the next few years.
And our recent results are consistent with the 14% to 16% target range.
At the same time, we're driving forward with our plan to surface value and profitability from our asset management platforms.
And are beginning to see progress there too.
While the path forward will not be a straight line, especially with the current market headwinds. We look forward to updating you as we progress on the plan.
That concludes the prepared remarks, so we'll be happy to take any questions.
Certainly ladies and gentlemen, as a reminder, if you do have a question at this time. Please press star one on your telephone if you'd like to remove yourself from the queue simply press Star. One again. Our first question comes from the line of <unk> from CIBC capital markets. Your question. Please.
Okay. Thanks for the question.
You mentioned that you have room for one more investment in <unk>.
Im just wondering what on X is remaining commitment might be to that fund I'm, just trying to get a sense of how much capital on X would have left to deploy none at the fund level, but at the on X level and I'm, just sort of thinking through the evolution of balance sheet liquidity in that context.
Yes, so I'll answer that in two parts. So we do have room for one more investment post accredited and op five.
We're pretty far along on an opportunity that we hope to have.
Done per the outlook for our LP agreement rules by the end of this month.
For the next 12 to 18 whatever months is going to be before we began fundraising for opiate six again, we do have plans that will hopefully be able to share with you early next year in terms of.
Capital deployment for the <unk> team on furniture and ways to do that but you should expect on a portion of that to look very similar to what it would have looked like in terms of <unk>, which would have been sort of $4 to $500 million deployment every year.
Okay.
Are you able to speak on.
On the ASM transaction, just how the exit value might have compared.
To your own internal fair value estimate.
We have been incorporated.
It was essentially at the Mark there is a bit of an earn out component to the deal where when that when the dust settles, we could be a couple of percent below or a couple of cents above but you should you should view that has to be right on the mark.
Okay and then one last question for me I was just wondering if you could speak to the monetization pipeline more broadly and I think Chris might have had a few comments that I might have missed but without being too specific would you say you have a few other irons in the fire there.
We do we do.
Some partial sum.
Full exiting that we do it where you do are we always try to keep and somewhat balanced capital deployment and capital return and I would expect you to to see a few other monetization is coming over the coming.
Quarter or quarters.
Yes.
Okay. That's all I had thank you very much Chris Yes, sorry, Nick it's Chris I'll just jump in because you might have been confused by my comments around <unk> five.
Just want to clarify that.
As that fund raises more capital on X will be diluted in the first two deals. So we're not talking about realizations from those deals, but simply us being diluted and receiving returns of capital from the new investors and that could be up to about $100 million is on cap five works towards its final close.
Oh understood Okay, alright, thanks, Chris.
Okay.
Thank you one moment for our next question.
And our next question comes from the line of Graham Ryding from TD Securities. Your question. Please.
Yes.
Hi, Good morning, maybe I'll just.
And that same thing can you just remind us of what you're targeting for timing.
And.
Potential size for the Olympics Transportation fund and also the.
Five fund.
<unk>.
Yes, so for on X transportation.
We haven't publicly come out with a fund size for that.
The plan is for us to warehouse the first one or two deals that they do they do have a very good pipeline of Lps.
Like that strategy they'd like to see what's the first deal looks like but I would expect us.
To have something if not closed signed within the next couple of months, where that that would trigger are beginning to formally fund raised for that platform. So we've been out meeting Lps.
And getting the pipeline fill but we havent formally started fundraising yet, but I would expect us to do so sometime.
In the early part of the first half of next year.
In terms of on cap target fund size, there I think we've spoke positively about one five.
Billion.
Still remains the target size of that fund.
<unk>, Chris is 200 $200 million.
That's right.
Okay.
Okay.
That's helpful.
And then just with your cash at $1 5 billion should we be interpreting that as you still are in a position with excess liquidity to support buybacks.
That's one that's one source of that liquidity.
Need for that liquidity or the desire for that liquidity, yes, we're continuing to buy back shares, but again as I mentioned at Investor Day, and last quarter. It also gives us some optionality in a very volatile market, where we'd like to be able to take advantage of some opportunities as they may arise on the near term.
Volatility creates opportunity and we just want to be able to pounce on that should it arise in the near term.
Is that like.
Yeah.
Like private equity.
Portfolio type opportunities or are you thinking more asset management tuck in M&A type opportunities what are you referring to there it's more of the former.
Okay.
What we do what we are looking at tuck in acquisitions as well.
The asset management side, but when I when I talk about being really opportunistic Hassan it's deploying capital whether that be.
And our P/e deal on the equity side or some kind of junior capital in the industry, we don't really well.
Okay, Great and then one last if I could just on the CLO side, how are your default rates, they're trending relative to what youre seeing in Europe.
Overall, I guess, the high yield market leverage loan market.
Yes again the portfolio is in very good shape and in particular, if you look at the portfolio against the various of risk metrics.
Track for CLO that might be the amount of triple <unk> in the portfolio.
Et cetera.
Typically top quartile across the industry and so we feel really well positioned with our CLO portfolio.
Particularly thank you.
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 Bobby Le Blanc for any further remarks.
Thanks for your time today.
If you have any questions as always feel free to call me or Chris or Jill reserve, we'd be happy to answer your questions Hope you have a nice weekend and look forward to talking to you all again soon.
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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Welcome to Onyx third 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 keypad as a reminder, this conference is.
Is being recorded I would now I'll turn the call over to Jill harmonic managing director shareholder Relations and communications at Onyx. Please go ahead.
Hello.
Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website hosting the call today are Bob Vila block on <unk>, Chief Executive Officer, and Chris Galvin, Our Chief Financial Officer.
Earlier. This morning, we issued our third 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 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 other.