ONEX has poor returns vs the SP500…

Onex Corp. is a financial company that manages and invests capital in its private equity, credit, and wealth management platforms. It is a leading private equity firm with $45 billion of assets under management. Onex makes investments on behalf of shareholders, institutional investors, and high net worth clients worldwide. Its reportable segments are investing, and asset and wealth management. About 90% of segment earnings come from the investing segment.

Onex practices value-oriented investing with a bottom-up, fundamental, and structural analysis in its credit platform. The firm operates through two private equity platforms – Onex Partners and ONCAP private equity funds, and Onex Credit and Gluskin Sheff. Onex Partners focuses on investing in small and medium-sized businesses in North America and Western Europe while ONCAP focuses on the middle market and smaller opportunities in North America.

Gluskin Sheff is one of Canada’s pre-eminent wealth management firms. About 60% of Onex’s AUM consists of private equity, and the rest is cash & near-cash items (28%), credit (10%), and real estate & other investments (1%). The company has offices in Toronto, New York, New Jersey, Boston and London.

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Investment Data

Revenue Growth & Market Exposure

In the last 36 years, Onex has built more than 105 operating businesses across a wide range of industry sectors including consumer & retail, financial services, healthcare, industrials, etc. It invests in a diversified portfolio of credits in various sectors and parts of the capital structure. It manages fund investor capital (~$31 billion) on behalf of investors from around the world.

On December 31, 2020, substantially all of Onex’s shareholder capital was invested/ committed to its private equity and credit platforms. These include public and private pension funds (27%), banks & insurance companies (22%), family offices (22%), and asset managers (21%). This diversification helps to generate a regular stream of annual management fees and provides the opportunity to share the profits of the fund investors. 

Over the past five years, fee-generating capital under management has increased by 16% CAGR per year. The company’s investing capital per share also grew 7% to $7.2 billion in the latest quarter. Gluskin Sheff’s client capital increased by 4% in the quarter, driven by higher client inflows and better investment performance. Total assets under management also increased by 14%, including the acquisition of Falcon Investment Advisors in the last year.

Through Onex Partners, the firm targets investment opportunities in the US, Canada, and Europe. Onex also invests primarily in non-investment grade debt through ONEX Credit. The acquisition of Gluskin Sheff + Associates resulted in the creation of a comprehensive platform fully capable of meeting market demand, expanding its distribution channels, and growing its fee-generating AUM.

Onex deployed more than $290 million and received ~$70 million of realizations and distributions through its private equity investing activities. The company’s operations were not adversely affected by the pandemic, as nearly 60% of its private equity exposure was in businesses where the pandemic had a low or positive impact. New strategies across credit platforms and private equity investments should continue to generate strong value. Onex focuses on acquiring and building high-quality businesses with strong free cash flow characteristics.

The company focuses on acquiring and building high-quality businesses with strong free cash flow characteristics. Its revenues have grown at a rate of 8% CAGR in the last five years. With 35 years of experience, Onex has developed strategic investment philosophies, talent, financial resources which have helped the company maintain a leading position in the industry.

Dividends

Onex is a Canadian Dividend Aristocrat paying consistent dividends every quarter for more than 30 years. Though its average annual yield is low at 0.45%, its dividend growth rate has been impressive. The firm last increased its quarterly dividend by 14% to C$0.10 in 2019 and sports an impressive dividend growth CAGR of 15%+ over the last decade.

The company pays quarterly dividends and also has a share buyback policy. It returned $29 million to shareholders through dividends and repurchases of $444 million during 2020 and more than C$3.3 billion since 1997. Its financial strength comes from both its own capital as well as the committed capital from its fund investors. 

It has been successful in generating higher returns than the broader private equity market consistently over the long term. Its credit platform focuses on generating strong risk-adjusted returns. The firm has a good track record of solid performance with 27% annual returns on its private equity investments. Onex’s policy to maintain a financially strong parent company makes funds available for capital commitments and growth.

The firm identifies businesses with strong capabilities and solid free cash flow characteristics. It has completed 680 acquisitions with a total value of $95 billion as of December 2020. Gluskin Sheff is one of the largest contributors to growth with increased client additions and good investment performance.

Onex is witnessing good synergies between the investment teams managing its private strategies and Gluskin Sheff’s public strategies. The firm owns large global funds operating in multiple asset classes and provides the best-in-class investor services. Moreover, real assets provide an attractive solution to institutional and retail investors. The firm has nearly $1.4 billion in cash and equivalents on its books and no external debt. The private equity industry is worth trillions of dollars in value and Onex as a leading asset manager, should continue to benefit from this growth trend.

Competition

The firm competes with other investment funds as well as with institutional and strategic investors. Brookfield Asset Management, CI Financial Corp, IGM Financial Inc, Fiera Capital Corp., Fairfax India Holdings are a few of its competitors. Onex’s large-scale capital provides it a huge competitive advantage over its peers. In addition, each business in which an Onex Fund invests also faces inherent risks.

Bottom Line

As one of the oldest private equity firms, the firm has earned investor confidence and has grown rapidly with a disciplined approach to investing and a focus on capital preservation.  In total, the Onex Group returned $2.7 billion to investors in the last year. Onex has substantial financial resources to support its investment strategy and is growing through considerable investments each year.

It continues to invest in Asset and Wealth Management platforms for sustainable earnings growth. Given the huge growth potential in the form of increased capital, fee-generating assets, strong financial backing, and long dividend-paying history, Onex should continue its dividend growth streak in the future.