Q3 2024 Onex Corp Earnings Call
Thank you for standing by and welcome to Onyx third quarter 2024 earnings results Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. If your question has been answered and you'd like to remove yourself.
The queue simply press star one again.
As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Jill how many <unk> managing director of shareholder Relations and communications at Onyx. Please go ahead. Thank you good morning, everyone and thank you for joining us.
Broadcasting this call on our website hosting the call today are Bobby Le Blanc.
Executive Officer, and Chris Galvin, our Chief Financial Officer.
Earlier. This morning, we issued our third quarter 2024 press release, MD&A and consolidated financial statements.
Available on the shareholders section of our website and have also been filed on SEDAR a supplemental information package is also available on our website.
As a reminder, all references 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.
In today's presentation and remarks.
Bobby: With that I'll now turn the call over to Bobby.
Bobby: Good morning, everyone.
Bobby: <unk> had a solid third quarter with sustained progress on realizations investing activity and fund raising in our core areas.
Bobby: We continue to align our businesses to areas, where we have the greatest right to compete.
Bobby: While benefiting from a strong balance sheet.
Bobby: And of considerable liquidity position.
Bobby: This morning, we announced a substantial issuer bid or <unk>.
Bobby: While we've been very active with our CIBC.
Bobby: Buying back nearly 4 million shares over the last 12 months.
Bobby: Yes, I'd be allows us to accelerate and expand our efforts, while our shares continue to trade well below intrinsic value.
Bobby: And provides all shareholders an opportunity to participate in our buyback activity.
Bobby: Considering our pro forma cash position of over $1 8 billion.
Bobby: We are confident we can execute on the seb.
Bobby: While continuing to effectively invest in other areas, we choose to prioritize.
Bobby: Strategic capital allocation was a key theme of my remarks at last year's Investor Day.
Bobby: To continue to grow and create value for on X and our stakeholders, we need to be smart and disciplined in how we use our capital.
Bobby: Turning to our businesses are.
Bobby: Across our platforms, we are seeing good momentum and positive outcomes.
Bobby: Our structured credit business led by Ronnie Jabber and supported by a talented and experienced team of credit professionals has become a market leader.
In 2024.
Bobby: The team has already completed 23 transactions.
Bobby: Raising $5 6 billion of new fee generating AUM and.
Bobby: And extending another $5 billion.
Bobby: Within the structured credit we have been consistently punching above our weight on.
Im slugging bigger and more established players.
Bobby: For the second consecutive year.
Bobby: We expect to be a top 10 global CLO issuer.
Bobby: The outlook for continued growth remains strong.
Bobby: As the CLO market remains very attractive for managers like Onyx with experience and track records of successfully managing through cycles.
Year to date, our team has increased our structured credit fee generating AUM by 22%.
This is an achievement that should not be overlooked by our shareholders.
Bobby: Looking at fee generating AUM more broadly.
We are also seeing positive momentum in our private equity businesses.
Bobby: Uncapped five now has over $1 billion in total commitments and the Onyx partners opportunities fund is approaching $1 2 billion, including pending co investment commitments.
Bobby: Multi teams have been active with investing in realization activity.
Bobby: Onyx partners recently closed its first investment for the opportunities fund fischbach with another Firestone expected to close shortly.
Bobby: We continue to emphasize our priority sectors and investment theses.
Bobby: And both transactions are prime examples of this.
And realizations Q3 saw the close of the ASM and globe sales and a partial realization of power school.
Bobby: Which closed after quarter end.
Bobby: The industry continues to face challenges around realizations.
Bobby: I am, particularly proud of what our teams were able to accomplish on this front.
Bobby: Year to date.
Bobby: We've returned over $2 7 billion of capital to limited partners with an extra share being over $900 million.
Bobby: This is an accomplishment that speaks to the quality of the portfolio and our ability to deliver for our clients in all market environments.
Bobby: The strategic alignment of our businesses and balance sheet to our long term objectives continues to be my top priority.
Bobby: Onyx whirlwind through smart and disciplined decision, making related to how we allocate our resources.
Bobby: We remain committed to delivering attractive returns for our investors and shareholders with that I'll now turn it over to Chris.
Chris Galvin: Thanks, Bobby and good morning, everyone.
Chris Galvin: Onyx ended Q3 with investing capital per share of $113.37.
Chris Galvin: <unk>, a return of 3% in the quarter and 9% over the last 12 months.
Invested capital per share has now returned 14% annually over the last five years.
Chris Galvin: Squarely in the range of through cycle returns we target.
Chris Galvin: We made good progress on both the realization of investment fronts since June on.
On X partners for completed the sale of ASM and in October realized about half its interest in power school as part of its privatization.
Chris Galvin: Partners also completed its investment in Fischbach in October the first investment any opportunity fund.
Chris Galvin: Together with on cap sale of Anglo and several smaller p/e distributions. These transactions generated $640 million in net proceeds to on X.
Chris Galvin: This brings our cash and near cash position to about $1 8 billion.
Chris Galvin: Or 22% up investing capital today.
Chris Galvin: <unk> repurchased approximately two 2 million shares in Q3.
Chris Galvin: Over the last 12 months share repurchases totaled over $3 9 million or 5% of outstanding shares.
Chris Galvin: These repurchases were completed at an average price of Canadian $90 80.
Chris Galvin: Allowing us to capture a Canadian $235 million of art for.
Chris Galvin: For our continuing shareholders.
Chris Galvin: The substantial issuer bid announced today.
Chris Galvin: Allow us to take advantage of our strong liquidity and capture meaningful value by repurchasing at what we believe remains an attractive discount to intrinsic value. While also leaving us with a lot of capital pursue other opportunities.
Looking at our investing returns, but private equity RP.
Chris Galvin: Our PE portfolio produced a $96 million net gain or 2% return in Q3.
Chris Galvin: Returns in the quarter were driven by <unk>, five as well as direct investments.
Chris Galvin: Looking at returns over the last year, we saw double digit returns across three of our core verticals financial services industrials and business services.
Chris Galvin: While experiencing more challenging results in our healthcare and consumer verticals.
Chris Galvin: At any moment in time, certain verticals or businesses will always have more or less momentum.
Chris Galvin: We benefit from the diversification of over 40 businesses in the <unk> portfolio.
Chris Galvin: Turning to credit results.
Chris Galvin: Our credit investments delivered a $29 million net gain or 3% return in Q3.
Chris Galvin: The gains were driven by our structured strategies and particularly by our CLO investments in.
Chris Galvin: In line with the return for the leverage loan market this quarter.
On the asset management side of the business.
Chris Galvin: <unk> ended the quarter with just over $34 billion of fee generating AUM.
The increase over the prior quarter reflects new commitments made to on cat five and the Onyx partners opportunity fund as well as several new CLO.
Chris Galvin: In total Onyx raised approximately $2 $1 billion of FGA AUM across private equity and credit in Q3.
Speaker Change: A good portion of the AUM growth came from our CLO business, which as Bobby noted continues to have a stellar year.
Speaker Change: Onyx has raised or extended over $10 billion of fee generating assets in our CLO platform. This year across 23 separate transactions.
Speaker Change: This includes $1 7 billion of AUM from three CLO is closed in Q3.
Speaker Change: And the pricing of our 11th European CLO will add approximately $560 million in fee generating assets when it closes in Q4.
Speaker Change: I think its worth taking a deeper dive into the extension activity in the CLO platform. So far this year.
Speaker Change: At the start of the year about 65% of our CLO AUM was in its reinvestment period.
Speaker Change: Once the CLO is out of its reinvestment period.
Speaker Change: AUM begins to decline as the CLO pays off its liabilities.
This decline decreases our fees and reduces returns for CLO equity investors, including Onyx.
Speaker Change: Through the team's hard work, we now have about 85% of our CLO AUM.
Speaker Change: Investment period, and importantly, the weighted average reinvestment period for the CLO now ends in October 2027.
Speaker Change: Extension typically don't have a big impact on FCA AUM growth, but rather they reflect the quasi perpetual nature of CLO AUM and a.
Speaker Change: <unk> value of our structured credit business.
Speaker Change: Turning to fee related and distributable earnings.
Speaker Change: Total FRE was at breakeven for Q3 with $6 million of earnings from the asset management platform.
Speaker Change: The improvement from Q2 reflects increased fees from <unk>, 5% and structured credit together with the continued impact of our focus on efficiency.
Speaker Change: Run rate management fees were $187 million at quarter end up $8 million from Q2, driven by the additional CLO AUM previously discussed.
Speaker Change: As for distributable earnings on X generated $267 million a day in Q3, driven by realizations and pay as well as recurring CLO distributions.
Speaker Change: Finally, an update on on X as incentive fee.
And carried interest opportunity.
We ended Q3 with $270 million of accrued carry which reflects $22 million generated in the quarter, primarily from Onyx partners five and the Ryan continuation fund.
Speaker Change: As a reminder, onyx has over $32 billion of private equity and credit AUM subject to carry or incentive fees, which provides a meaningful opportunity for value creation going forward.
Speaker Change: In summary, we had a solid quarter of progress across both investing in asset management and the teams are working to ensure that continues through year end.
Speaker Change: That concludes the prepared remarks, we will now be happy to take any questions.
Certainly and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.
Speaker Change: And our first question comes from the line of Nik Priebe from CIBC capital markets. Your question. Please.
Nik Priebe: Okay. Thanks.
Speaker Change: The pricing range on the modified Dutch auction straddled the closing share price yesterday.
Speaker Change: Point earlier today the share price had reached the upper end how does the determination made on that pricing range.
Speaker Change: <unk> advances hiring do you have flexibility to bump the range otherwise you risk limited take up.
Speaker Change: Not an event driven guys. So just some insight on that dynamic would be helpful and interesting.
Speaker Change: Yeah, I think you've got that right Nick.
Speaker Change: Do have the ability to amend the bid at any point in time, which would then extend the.
The end period, but.
Speaker Change: But we gave a lot of thought to that range, we reflected on our own normal course issuer bids by stock buyback activity over the last year the liquidity in the stock.
Speaker Change: And in the run up that it's had over the last month and we think we've chosen a range that is going to be helpful. For some of our shareholders who want liquidity at these levels.
Speaker Change: But at the same time, we're very happy with the range from the perspective of the value, it's going to create for our continuing shareholders.
Speaker Change: It's not it's not scientific there you've got to have some judgment, but we're very comfortable with where we set the range.
Speaker Change: Okay fair enough.
And then just turning to the private equity returns.
Speaker Change: The public benchmarks in the quarter was there anything that stood out there is an outlier in terms of the sequential change to the individual.
Speaker Change: Portfolio company marks.
Matt: Hey, Nick it's Matt.
Matt: Okay.
Matt: Hi, Chris.
Matt: No go ahead.
Matt: Yes, I was just going to confirm that.
Matt: Talk about on most calls.
We do tend to lag big moves in the public markets given the way we value some of our assets using DCF, but I'll, let Bob talk to the portfolio as a whole or anything specific.
Bob: But Chris is right that's exactly what I was going to say so we are in the same on the same wavelength, but.
Bob: And any given quarter. It is also just pockets of earnings volatility.
Bob: Had a little bit of that.
Bob: On our health care portfolio.
Bob: Some consumer businesses past funds, but overall again I think it's more of a lag effect than anything fundamental.
Speaker Change: Yeah, Okay fair enough.
Speaker Change: And then just last one for me I was wonder if you could just tell us a little bit more about.
Speaker Change: What's being done internally to incentivize and retain investment personnel on the on X partner side, just in light of the stalled fund raising and how you're balancing that against the objective of stabilizing effort as well.
Yes, so I think we've actually done a very good job.
On that front.
Speaker Change: As people have left the firm over the last year or two that were part of that team we were able to reallocate Kerry.
Speaker Change: NLP five but of course, the carry and the opportunities fund, where given the size of that team and the dollars that we have to manage I think I think we're in pretty good shape on that front.
Speaker Change: Okay, Alright fair enough that's it for me I'll turn it over thank you.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line of Graham Ryding.
Speaker Change: From TD Securities Your question please.
Graham Ryding: Hi, good morning.
On the private equity fundraising side are you.
Speaker Change: Complete are largely complete now on the on X partners opportunities fund an untapped five.
So.
Graham Ryding: Let's start with on caps.
Graham Ryding: There'll be fundraising for about another three months and we do expect.
Graham Ryding: More commitments within that three months period relative to where we are today, we're actually quite feeling quite good about the next three months there.
Graham Ryding: And at the same timeline for the opportunities fund.
My guess is it won't have.
Graham Ryding: On capital, there's a bit more upside from this point forward than <unk> in terms of incremental dollars, but they'll both be wrapped up in.
The first month of January.
Speaker Change: Okay understood has that been extended or I thought you were sort of looking to wrap them up.
Speaker Change: Our revenues.
Speaker Change: Because of demand or no.
Speaker Change: No I don't recall exactly when they were extended but they were in Thats, where our Lps for both firms.
Speaker Change: Came out on the expenses.
Speaker Change: Alright, understood and then how 'bout.
Speaker Change: <unk>.
Speaker Change: Just on the private equity side. The emphasis in 2025 are you targeting any p/e fundraising or is portfolio realizations more of a focus next year.
Speaker Change: Yes, I think it's going to be capital deployment and portfolio realizations will be more of a focus in 2025, but I also think as.
As a firm across our <unk> platform and our credit platforms that are supported by our sales team, we kind of need to be fund raising all the time not just when the funds are coming due and I think youll see us.
Doing a lot more of that going forward, but there won't be any fund raising per se for new dollars for those two platforms in 2025.
Speaker Change: Okay.
Speaker Change: Excellent staying on that theme then.
Speaker Change: As you do monetize some of your.
Speaker Change: Portfolio investments in 2025, particularly around partners.
Speaker Change: Do you envision remaining active on the.
Speaker Change: Share buybacks, if your cash levels build.
Speaker Change: And your stock continues to trade below NAV or do you feel.
Speaker Change: Some need to keep some powder drive for 2026, if you arent too to re initiate fundraising.
Speaker Change: For on X partners six.
Speaker Change: Yes, so youre hitting on probably the thing that I think about most these days, which is our capital allocation just given our pristine balance sheet and our liquidity position.
Speaker Change: Again anywhere.
Speaker Change: The Zip code or.
Speaker Change: Our shares traded and I think you'll you should expect us to continue to be active buyers of our of our shares.
Speaker Change: And then the question really becomes what do we do with our capital going forward to make sure we're being we're being efficient with the cash and we don't have too much cash drag ongoing unrelated to our investing activities across PE and credit I'm working on that real time and I promise you in.
Speaker Change: All shareholders that as that becomes more clear that strategy a bit more clarity can be the could be the second to know after Christian.
Speaker Change: Okay.
Speaker Change: Okay understood.
Speaker Change: Chris just on the FRE.
Speaker Change: Is this level of compensation and overall expense a reasonable run rate.
Or is there anything timing related you would call out maybe for this quarter.
Speaker Change: And can you generate positive FRE in 2025 or is that more likely a 2026 dynamic dependent upon fundraise around the unexpected six.
Yeah. So.
Speaker Change: RF you I'll call it out of period adjustments in Q3.
Speaker Change: Related to just you make small compensation adjustments later in the year as you get towards year.
Year end and the catch up right back to the beginning of the year. So there's probably call it like $2 million across the firm.
Speaker Change: I would say.
Speaker Change: As a bit of a timing benefit in Q3, the run rates, probably more like a $2 million loss overall.
Speaker Change: It relates to 2025, we're actually right in the middle of budget setting budget. So I don't want to get too far ahead of that but I think what youre going to see is continued.
Speaker Change: Disciplined.
Speaker Change: Across.
Speaker Change: Private equity and a focus on private equity, increasing FGA, AUM, where we can and sometimes outside of normal I'll call. It fund structures. So I think we got it.
Speaker Change: And think continuation vehicles and things like that.
Speaker Change: That front just to give a color here.
Speaker Change: Yes.
Speaker Change: And then I think we've got great momentum to.
Speaker Change: To continue to build.
Speaker Change: FRE there, particularly on several of our businesses were.
As we scale a tremendous amount of the topline increase will drop to the bottom line. So I think we've got good momentum to improve on that going into two.
Speaker Change: 2025, I don't want to give you a number quite yet.
Speaker Change: Okay understood.
Speaker Change: <unk>.
Speaker Change: My last question, if I could just CLO fundraising has been very strong this year obviously.
I think it came in much higher than your original $2 billion to $3 billion.
Speaker Change: Target. So what would you attribute that to and what do you think is a reasonable target for 2025 for that business. So.
Speaker Change: So we don't have a budget yet for 25, but I would say.
Speaker Change: Drove it this year are two things one there is a just a very high demand for CLO paper relative to historical norm I don't think this will be a normal year. When we look back I think it was a normal year, we would be something a bit less active than this today, but I must tip the hat to the team.
Speaker Change: They were they were able to take advantage of this market continue to gain market share and once again will be a top five or 10 ish or globally.
Clothes and the active management space added to extend existing CLO V stream as Chris mentioned in his remarks do create a quasi permanent capital element to that business, which is which is really attractive and it's important to also note that in spite of all of that growth our our metrics around.
Speaker Change: Impairment.
Speaker Change: And size of impairment remained industry, leading so.
Speaker Change: Really just kudos to that team and how well.
Speaker Change: They've done they've taken over managing that platform.
Speaker Change: And by the way a very scalable business.
Speaker Change: As we move forward. So when you think about 2025, FRE think about that really being.
Speaker Change: A business that.
Part of credit structured credit being a <unk>.
Speaker Change: Highly profitable business and we're working on ways for next quarter to show you to show you that in more detail.
Speaker Change: That's it for me thank you.
Speaker Change: 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.
Speaker Change: Thank you very much for taking the time, thanks to our team for helping put all this together for our earnings call today, and we look forward to catching up with you next quarter any questions in the meantime feel free to reach out to Chris Muir, Joe. Thank you very much.
Speaker Change: 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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