Nov 11, 2016
Executives
Emilie Blouin - IR Jerry Schwartz - CEO Chris Govan - CFO Seth Mersky - Senior Managing Director
Analysts
Geoff Kwan - RBC Capital Markets
Operator
Welcome to the Onex’s Third Quarter 2016 Conference Call. My name is Kaila and I will be your operator today.
During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session.
[Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Ms.
Emilie Blouin, Director, Investor Relations at Onex. Please go ahead.
Emilie Blouin
Thanks, Kaila. Good morning, everyone and thank you for joining us.
We are broadcasting this call live on our website. With me today, are Jerry Schwartz, Chris Govan, and a number of our managing directors.
The third quarter MD&A and consolidated financial statements are available on our website and have also been filed on SEDAR. A supplemental information package, which includes the How We Are Invested schedule, Schedules of Fees and Expenses and additional information, is also available on our website.
And some of you have may have noticed earlier this month we changed our TSX stock ticker to four letters, ONEX. We also launched the new website, which now provides a consistent experience across a range of devices such as desktop, tablet and mobile.
We hope you find it user friendly and easy to navigate. As always we welcome your feedback so feel free to reach out to me.
Before we get started, just a reminder that all references to dollar amounts on this call are in U.S. unless otherwise stated.
I must also remind everyone of the usual forward-looking statements disclaimer and need to point out that all information relating to the fair value of our private companies is the view of Onex management. In addition, later in this call, we will reference collateralized loan obligations, or CLOs and other offerings by Onex credit.
We are required to remind you that these offerings are made solely to qualify the institutional investors and to certain non-U.S. investors in private transactions not requiring registration under U.S.
securities laws. The securities are not and will not be registered under U.S.
securities laws and cannot be offered or sold in the U.S. without registration or exemption.
With that, I will now turn the call over to Jerry.
Jerry Schwartz
Thanks, Emilie, and good morning, everyone especially on this another beautiful day here in Toronto. Even though the number of leverage buy-outs completed globally in the third quarter was off [ph] 35%, last year we’ve been very busy with four acquisitions.
The two largest investments on the list include a carve-out from Tungsten network of the intellectual properties [indiscernible] renamed by us Clarivate Analytics. It looks like a [indiscernible] and Save-A-Lot.
Including Save-A-Lot, we have invested or committed more than $2 billion taxable [ph] this year. Which includes roughly $730 million directly from Onex.
At the end of the year, Onex Partners IV which is our most recent and largest [indiscernible] equity fund will be about 60% invested, that will leave us room for roughly two more investment before we’re in position to start thinking about or acting on fund raising for the next OP-1, OP-5 [ph]. For now, we have plenty of cash in our [indiscernible] great opportunities and I am going to leave it to Chris to talk more about our current cash position.
This is our first call since we announced the acquisition of Save-A-Lot. I’d like to give you a little -- some color on that business.
Save-A-Lot is one of the largest hard discount grocery retailers in the U.S. It has almost 1,400 corporate and license stores that cater to those with an annual house holding income of $50,000 and less.
So that gives you a pretty clear picture of the demographic of what they offer and to whom. The company’s format and limited product assortment is designed to offer prices 30% to 40% lower than conventional grocers.
It does that by having a more efficient supply chain and lean in-store operations. It’s really very tough for a conventional grocer to replicate the hard discount model, they almost have to rebuild their entire distribution network to do that and that is a competitive advantage that gives us a real time in the marketplace to do what we think could be done with Save-A-Lot.
We also think the lower income market is underserved and especially in today’s environment this appreciates the prices that Save-A-Lot provides. Matt Ross, Managing Director of our New York Office has been working on and developing the restaurant and retail space for a couple of years.
Save-A-Lot was a direct result of his efforts and that is very typical of what we hope we’re doing and are doing in Onex which is identifying areas that we think are of value-invest in segments, doing a lot of work on those and then finding real, we hope gem opportunities. Matt and the team are going to be really busy separating this company Save-A-Lot from its parent and working with the management on a long list of attainable improvements.
We expect to close this transaction by the end of February and then really get to work on it. There is no question that Save-A-Lot is a bit of a fixer-upper opportunity.
We also realized realizations and distributions from our portfolio companies during the year or during the quarter, I should say. Most notably we refinanced AIT and [indiscernible].
In total including a few smaller items we received $230 million for our funded investors in this quarter, of which 66 million went to Onex. After the quarter end JELD-WEN also completed a refinancing which was in part used to fund a distribution to shareholders.
Total realizations and distributions year-to-date, that's full year-to-date have been $1.4 billion, of which Onex has received about 390 million of that. Our credit platform continues its growth in the quarter.
It priced CLO-12 for approximately $560 million. We also just days ago announced a $400 million refinancing and re-pricing of CLO-2.
This transaction has the effect of extending the reinvestment period in CLO-2 for another two years and we expect that will generate stronger returns on our equity investment and also of course provide us with continuing fees for those extra two years. We're getting a lot closer to launching our direct lending platform which we have spoken to you about in the past, we'll share more details of that in due course and I hope very due course.
Now, I've saved the best for the last. The event we're most proud of since last we spoke is the successful fundraise of ONCAP IV.
We were in and out of the market in just over two months and held our first and only close earlier this week raising $1.1 billion. Onex as always is the largest LP with the $480 million commitment.
The ONCAP and Onex teams also committed meaningful capital for the funds. I really want to take our hat off to Emma and her entire team that worked on this financing and hats off also to Michael Lay and his entire team that runs ONCAP in today's day and age to do a two month one-and-done closing.
It's almost entirely unheard of and it’s thanks to the confidence of our investors and thanks to the great work of the team at ONCAP and the sales team and the marketing team at Onex for having pulled this off. The firm had significant demand from both existing and new investors and at the end about 90% of department capital came in from our existing partners.
We are delighted with the outcome and what it says about Michael Lay, his team at ONCAP and the overall management team at Onex, well done everyone involved. As most of you know, our distinctive ownership culture requires, not just asks for but requires, Onex management to have a significant stake in Onex shares and to make meaningful personal investments in everything we do.
We hope to always maintain a very close alignment with our shareholders and with our limited partners. Over the last four months our team has invested a further 77 million bringing its investment to $1.8 billion in our operating companies, credit platform, and shares.
This financial alignment is critical to our culture and our overall success. We share and believe we should share in the risks and therefore the rewards of everything in which we invest.
With that, I’ll now turn it over to you Chris.
Chris Govan
Thanks Jerry. Good morning everyone.
As was the case last quarter, I’ll spend my time reviewing Onex’s performance relative to our shareholders value models. That's the model that illustrates how we expect to meet our long-term target of 15% annual growth in capital per share.
To do that, we need to be about 75% invested, generate blended returns from private equity and credit in the high teens and benefit from the positive operating leverage that we expect our asset management platforms to provide. So let’s look first at our mix of assets.
As you would expect the quarterly changes in our asset mix were driven by Onex’s investment activity, both in private equity and credit, and our stock buyback program. Q3 saw complete investments in WireCo, and Tecta, while also selling CCs [ph] and receiving over 30 million of distribution from a few other operating companies.
On a net basis these transactions increased Onex’s private equity assets by about $70 million. Onex also funded $60 million in the quarter to support our growing CLO platform.
Specifically the warehouse for CLO-12 which closed in October. Overall and including the $35 million we put to work buying back stocks.
Onex’s cash position decreased from 36% to 34% of hard NAV during Q3. As Jerry discussed there were couple of significant events subsequent to quarter end and these will meaningfully impact our asset mix.
On October 3rd we completed the acquisition of Clarivate Analytics, which included the co-investment from Onex. And a little later last month we announced the acquisition of Save-A-Lot.
If you pro forma the quarter end numbers for those two transactions, and a recent distribution from JELD-WEN cash as a percentage of hard NAV falls to 25% bringing Onex to 75% invested, in line with our model. Now of course, there is going to be activity between now and yearend, that's going to affect our allocation, but we are very happy with the progress we made this year getting Onex’s capital to work.
Investing Onex’s cash is important, but it is critical that the investments we make generate attractive risk adjusted returns over time. So let’s look at the performance of our investment in Q3 by reviewing the quarter-over-quarter changes in the [technical difficulty] investment schedule.
Looking at that schedule, you’ll see the investment in Onex partner private companies with a 133 million greater than at the end of Q2. This was partially due to the investment activity I mentioned earlier, but it was actually driven by over 90 million of value generated our operating company or about a 4% quarterly return for Onex.
Our credit investing also contributed to NAV growth in Q3 generating a net return of $52 million. That includes 44 million of mark-to-market gains from our CLO investments as the leverage loan market continued to perform well, despite the meaningful uptick in Q3, our quarter and CLO mark still reflective of $40 million of unrealized losses from prior quarters.
But we remain confident that the balance of these mark-to-market losses will reverse as those CLOs mature. Now, we provide you with the mark-to-market results every quarter, but internally we tend to look at our CLO platform from a cash flow perspective and from that perspective performance continues to be on plan.
Onex received distribution from existing CLOs of 18 million in the quarter bringing aggregate distribution to $70 million [ph] in the last 12 months. On a cash basis, that’s a 17% return on original cost of about 420 million.
Looking at the schedule as a whole, our hard NAV per share at quarter end was $57.37, up $1.61 or about 3% from Q2 and based upon yesterday’s exchange rate that hard NAV is Canadian $77.35. So my comment so far is focused on the 6 billion of capital that we invest on behalf of Onex shareholders.
Where the shareholders also benefit from $17 billion that Onex manages on behalf of its fund investors. The last piece of our shareholder value model is operating leverage, and that’s the positive contribution that we expect from managing that third party capital.
The schedule of season expenses detailed through revenue and expense items for Onex and its asset management platform. Our PV’s asset management platforms were essentially breakeven during the LTM period with the overall contribution including Onex credit and a parent company coming in at negative 16 million.
I’ll make a couple of comments around these LTM results with a view to providing you some guidance on what to expect in the coming quarters. As we’ve discussed before, as our private equity business growth, management fees growing in bit of a step function.
Annual fees should step up when we raise a new fund and we’re getting earnings fees on that new committed capital, but then annual fees will slowly recede between fund raisers as we realize on asset in older funds on which we earn fees on invested capital. On this basis, Q3 2016 will likely represent a trout in our private equity fee.
On CAP-3’s commitment period ended during the quarter and on CAP-4 did not begin to accrue until the close earlier this week. Adjusting for the 600 million fee generating assets raised were on CAP-4, our run rate private equity fees are now $111 million.
In addition as Jerry noted, after two productive years investing at Onex partners for were only about 2 investments the way for being 75% invested and that’s the level of which we would typically consider launching a successor fund. The other item I’d like to expand on is carried interest.
The LTM results includes 13 million of carry principally from the sale of [indiscernible]. As a reminder we include carry on this schedule on a realized basis and after a record year of realizations in 2014 it's really no surprise that the subsequent two years were relatively quiet on this front.
As such this very realized carry that's been reported over the last seven quarters. However this cash basis of reporting really does mask significant value that's been created.
At quarter end Onex’s unrealized carrying stood at a $183 million with 36 million of value generated during the LTM period. Now forecasting when Onex will sell an investment and realize the accrued carry isn't easy, however there isn’t anything mysterious about it either.
Realizing on an investments will almost always be driven by two factors, the degree to which we’ve executed on our investment thesis and the existence of stable to strong market to support a transaction. All of that is a long way of saying that with annual run rate fees from PE [ph] and credits in excess of a $150 million and a $183 million accrued carry going forward we expect the contribution from the asset management platforms to be positive.
That operating leverage will help us reach our long term NAV per share goal. And as we reach our goals over the long term we believe Onex's shares should reflect both the growth in the value of our investment and the growing contribution from management fund investor capital.
Over the past five years our hard NAV per share has grown as 10% CAGR, in U.S. dollars are stock has compounded at 16% over the same period.
That completes my comments and we'd now be happy to take any questions.
Operator
[Operator Instructions] Our first question comes from the line of Geoff Kwan from RBC Capital Markets.
Geoff Kwan
The first question I have was just, Chris going back to the slide you had on the management increasing, you talked about the run rate being $111 million versus 93 trailing [ph] 12 months. So you pick up a delta about $18 million there, but even if you assume that there's no additional compensation expenses tied to the revenue left, on the net contribution basis, I mean it still brings you out close to zero, and I can't remember if the credit side, some of the mark-to-markets within that.
I'm just trying to reconcile as to how to think about -- let's call it the understand earnings potential of your asset management business and how that ties into the valuation of the stock?
Chris Govan
So, Geoff I think the numbers you cited are generally correct. I think the expense items and the compensation in the most recent LTM period are pretty much what you expect on a go-forward basis.
I don't think there's any suggestion from us that those are going to be declining over the next 12 months, I think one factor though to include, I think on the private equity side and I touched on that is, thinking about what carry contribution will be on a longer term basis and on an average basis rather than looking at it over the last few years on a realized basis.
Geoff Kwan
But assuming you got kind of a lift and carry as you monetize some more investments going forward, would that not lead to also a lift in your variable comp. So the bottom line impact would get muted to a certain extent or just like I said, just trying to understand the dynamics there.
Chris Govan
Sure, and I don't think there's any formula we can give you Geoff in terms of the connection between a realized carry and higher variable compensation of private equity business. I mean I think the co-relation as you know is that if we paid for performance and we believe there are investment professionals as it relate to their annual incentive, but that should also be very closely tied to successful outcomes as opposed to marks along the way and progress along the way.
So there always is going to be a connection there, but I think if you go back over time through our scheduled fees and expenses, a very meaningful part of that carry does falls bottom line but I'm going to agree with you that in years of higher carry that the compensation of private equity business is generally going to be higher because it's going to correspond with the performance and paper performance here at Onex.
Seth Mersky
Geoff, one modest -- this is Seth speaking. One additional note I would make is the way we account for performance fees and credit shows them dropping in the fourth quarter last year was a poor performance fee year for credits and so were not getting the benefit yet of accruing performance fees there and we’ll drop them into the fourth quarter.
Geoffrey Kwan
Sorry Seth, so you guys accrue for the compensation and Onex credit in the first two quarters and you would kind of get that again, the actual amount in Q4, but also your revenue, in other words the credit side assuming that you generate performance fees, would actually show sequential potentially meaning for lift is that what's you are getting at or?
Seth Mersky
Meaningful in the context of credit contribution. Yes, with respect to performance fees there we don’t accrue them until the fourth quarter because there is always a risk during the year that performance will have them reversed.
But yes you are right, that from a compensation perspective there is some compensation built into that credit number based upon the fact that the fund ahead so far this year and we would expect performance fees in the fourth quarter. So yes there is kind of mismatch over those first three quarter.
Geoffrey Kwan
Okay, I just wanted to make sure [indiscernible], okay. And then my next question was just on given the strong performance that’s historically there, I'm just trying -- I don’t know if you’ve talked about before and but essentially is there an opportunity to maybe exploit this strategy either with Mike’s team or setting a new team like Europe or some other geography?
Seth Mersky
One of the duties of ONCAP is that they have a very disciplined fashion stuck to their hitting and I think they want to continue to do that. So we don’t have any current plans to start an ONCAP in Europe, although one thing we did do as part of the ONCAP fund raising, we increased the threshold of transactions they could invest in North America up to $200 million.
And at the same time we amended Onex’s partners allowable transactions to include smaller transactions in Europe. So we recognized that we've been missing an opportunity there, but rather than add more staff into Europe, we’re going to see if we catch some of that with our existing Onex partners staff.
Geoffrey Kwan
Got it, okay. Thanks Seth.
And just one final question I had is just very-very early days here, but just given the U.S. election earlier this week if you guys have any early thoughts on impacts to your business kind of the investments that you've got as well as deal flow?
Jerry Schwartz
It’s Jerry and I certainly invite all of my colleagues to pitch in on this. My own feeling is that Mr.
Trump is so -- we’re still unknowledgeable about what he really stands for or what he might really do, that it’s much too early to try and understand, take a position or to act on it. We’re not in short-term market, up today market, down today business.
We’re in the long-term business. And one thing that I’ve found in the scene over many years with governments is they often get elected with a big far out claims on one side or the other depending whether they’re right or left wing.
But when it comes to actually acting in government, they all tend to move more to center then you would have thought. So I guess overall I’m probably not quite so pessimistic that Trump government could do things that would dramatically fast damage the economy or on the other side dramatically fast build the economy.
Anybody else want to add into that? Okay.
Geoff Kwan
Okay. No, that’s perfect.
Thank you very much.
Operator
[Operator Instructions] And that concludes our question-and-answer session. I will now turn the conference back to Jerry Schwartz.
Jerry Schwartz
Thank you all for participating in the call, we appreciate your support specially being here we assume you’ve all recovered from the staying up till 4 in the morning to watch the U.S. election.
So if you have any questions or new thoughts come to your mind, Emilie is here she has many of the answers. If she doesn’t have any, she’ll guess them and so please feel free to contact us and thanks again for your support.
Operator
This is the end of today’s call, you may now disconnect. Have a great day.