Nov 10, 2017
Executives
Emilie Blouin - Director of IR Chris Govan - CFO Gerry Schwartz - Chairman and CEO Emma Thompson - MD, IR Unidentified Company Representative -
Analysts
Geoff Kwan - RBC Capital Paul Holden - CIBC World Markets
Operator
Welcome to Onex's Third Quarter 2017 Conference Call. My name is Phyllis 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 will now turn the conference over to Ms. Emilie Blouin, Director, Investor Relations at Onex.
Please go ahead.
Emilie Blouin
Thank you, Phyllis. Good morning everyone and thanks for joining us.
We're broadcasting this call live on our website. With me today are Gerry Schwartz, Chris Govan and a number of our managing directors.
The third quarter MDA and consolidated financial statements are available on our website and have also been filed on SEDAR. Our 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.
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'll reference various private offerings of securities.
We're required to remind you that these offerings are made solely to qualified institutional investors and to certain non-U.S. investors and private transactions not requiring registration under U.S.
securities laws. These 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'll now turn the call over to Gerry.
Gerry Schwartz
Thanks Emilie. Good morning everybody.
I would like to spend some time today talking about our activities year-to-date although first let's take look at what we're seeing in the markets. You have all got a slide coming up now, great.
In Q3 the number of leverage bios [ph] completed and the amount of capital invested globally were both down about 30% versus the same quarter last year. High price expectations and lower quality of offered businesses likely are the major contributors to this decline.
Private equity backed IPO activity was also down with just four offerings in the U.S. during the quarter.
However the debt markets in both United States and Europe remain very strong as the demand of purchase debt continues to outpace supply very significantly. At Onex our investment pipeline at the moment is actually quite good and our team is busy.
To give you a sense at Onex Partners we looked at 40% more opportunities year-to-date compared to the same period last year. However, high valuations and aggressive time compressed sale processes both of which aren’t very good for us have led to make only one acquisition so far this year.
While the current investment environment is in fact challenging, we simply remain disciplined and continue to employ the exact same investing strategies, tools, and processes we have had successfully for decades. So let's churn to actual activity.
Over the last year, 12 months, the value of our private equity investments has increased by 17%. We're continuing to focus on value creation at our operating businesses.
This year many of them have completed add on acquisitions and have capitalized on the strength of the capital markets. Collectively they have raised or refinanced a total of $4.1 billion of debt.
More recently we sold a portion of our investment in BBAM, we sold it to GIC, the Government of Singapore Sovereign Wealth Fund and among the world's largest asset managers. As a reminder BBAM is a leading global manager of commercial jet aircraft in which we acquired a stake of 50% five years ago.
GIC's involvement will add to BBAMs resources and capabilities particularly in Asia, an important part of the market for these aircraft. Strategically the partnership builds on a first mover advantage as the world's largest dedicated manager of leased aircraft.
Including prior distributions we've now realized $454 million from BBAM and its related investments and continue to own 35% of the company. This is a really good milestone for BBAM and obviously for us as well.
Moving on to fundraising, this year we've raised $6.7 billion for Onex Partners V and that exceeds our original $6.5 billion target. We're now moving towards wrapping up the fund later this year with a hard cap of $7.15 billion.
Since the fund raiser is ongoing we're not in a position to provide additional color but we should be able to do so pretty soon. At Credit we continue to fund raise for our first direct lending fund.
Thus far we've raised approximately $290 million towards our $500 million target. That 290 million includes 100 million from Onyx.
As a reminder this fund will focus on providing credit to middle market and the larger borrowers predominately in the U.S. although selectively in both Canada and Europe.
The strategy and we will invest the majority of this funds capital in senior secured loans primarily of less capital intensive and less cyclical companies. To date we've invested slightly more than $300 million which was funded through our credit facilities.
As a result of our successful fundraising efforts we now manage approximately $30 billion. This provides us with ample funding to take advantage of future opportunities across all of our investing activities.
Turning now to the investing activities in our Credit business. Let me point out that last week we placed our second European CLO for €437 million.
We're pleased with the current pace of our activity and although it's still early days, we've had success leveraging our established presence in the U.S. CLO market.
Over the long-term we expect to grow our presence further in Europe. In the U.S.
we've continued to reset and/or refinance several of our CLOs over the past four months. Year-to-date across the CLO platform we have issued three new vehicles totaling more than $1.5 billion and refinanced more than $4 billion in existing six CLO's.
Finally one of the key pillars of our story is our teams meaningful personal investment in everything we do. Today this team has $2.1 billion invested in our shares, operating companies, and credit platform.
This does not include approximately 365 million of the team's uncalled commitments to our private equity and credit platforms. We believe, we really believe strongly that this distinctive ownership culture creates strong and valuable alignment with our shareholders and our limited partners.
That's it from me, I will turn it over to Chris.
Chris Govan
Great, thanks Gerry and good morning everyone. As usual I will spend my time this morning reviewing Onex's performance relative to our shareholder value model.
That model illustrates how we intend to generate long-term growth in Onex's capital per share. As a reminder we target being about 75% invested, earning blended returns from private equity and credit in the high teens, and generating positive operating leverage from our asset management platforms.
So let's first look at our mix of assets. Changes in our asset mix are driven by Onex's net investment activity both in private equity and credit.
Q3 was relatively quiet in our private equity business but we did put some money to work in late September by acquiring an interest in Onex Partners IV from a limited partner. We sold a portion of this interest to other limited partners in early October such that our net cash investment was $156 million.
This transaction also increased our uncalled committed capital to the funds by $69 million. This was a great opportunity for us to quickly and efficiently wrap a significant amount of capital and given that we bought a diversified portfolio made up of businesses and management teams that we know really well, we were attracted to this on a risk adjusted basis.
I do want to pause here and note that although the sell down of part of the commitment to other LPs did not occur until early October, we've chosen to present the investment here and throughout our Q3 MD&A on a pro forma basis as if the subsequent sell down happened in Q3. As a result of this increased investment in OP IV, Onex moved to about 72% invested overall at September 30th up from 70% at the end of Q2 but still a little shy of our long-term target of 75%.
Next I'll give you some color around our investment returns by reviewing the quarter-over-quarter changes in the How We Are Invested schedule. Our investment in the Onex Partners companies was up about 240 million driven largely by $156 million OP IV secondary purchase as well as an increase in the value of our publicly traded companies.
Combined our private and public Onex Partners companies provide a 3% quarterly return. These net markups also generated 19 million of additional unrealized carried interest for Onex.
The value of ONCAP operating companies increased by 34 million during Q3 or about an 8% quarterly return. However, about $18 million of distributions and a change in our presentation of unrealized carried interest have caused the net decrease you see on the schedule.
Historically, Onex's share of the ONCAP carry was included with the value of the ONCAP investments partly because it wasn’t a material figure. However with the growth of ONCAP's AUM we've decided to break the carry out and include it with the Onex Partners carry on a separate line in the How We Are Invested schedule.
Onex's share of the ONCAP unrealized carry was $28 million at quarter-end. Moving this to be unrealized carry interest line along with the 19 million of carry generated at Onex Partners in the quarter brings Onex's unrealized carry from its PE platforms to $202 million at quarter-end.
Our credit hedge fund and CLO investments generated 14 million of value or a little more than a 2% quarterly return. It just so happens that our net credit investment activity in the quarter which includes the receipt of regular distributions from the CLO's was an inflow of 14 million such that the total investment in credit of $627 million is unchanged and represents a little over 9% of our hard NAV.
Looking at the schedule as a whole, Onex's Q3 hard NAV per share was $63.88 up 2% since Q2 and 12% in the last 12 months. My comments so far have focused on the 6.7 billion of capital that we invest on the [indiscernible] shareholder.
But our shareholders also benefit from nearly $22 billion we manage on behalf of Onex's fund investors. We expect the management of this third party capital to provide a positive contribution to hard NAV growth over time or what we call operating leverage.
The schedule of fees and expenses that we publish quarterly provides one way of measuring Onex's operating leverage. On this basis our PE asset management platform has contributed 70 million over the last 12 months while credit contributed 20 million.
The overall contribution including the net cost to the parent company came in at $57 million unchanged from the LTM amount presented for Q2. Although LTM PE management fees are up slightly from Q2 you'll note that the current run rate of $102 million is down slightly from $105 million last quarter.
The decline in run rate fees is a result of Onex's increased interest in OP IV and the resulting decrease in LP capital. However this run rate does not include the net increase expected when we begin accruing fees from OP V.
We estimate run rate management fees would increase by approximately $33 million if OP V began accruing fees today. However we're not particularly concerned about when that happens.
We're focused on finding one or two additional investments to round out OP IV and that's never something we're going to rush. Looking forward to next quarter, there are some significant realizations in Q4 that drive realized carry up from the $95 million LTM amount.
We expect the 2017 full year contribution to approximate the $57 million reported here, a result that is consistent with our shareholder value model that provides Onex shareholders with the opportunity to benefit from positive operating leverage or as I and many other shareholders think about it, getting paid to have your capital invested by Onex. We believe Onex's shares should reflect both the growth and the value of our investments and the growing contribution from managing fund investor capital.
Over the past five years our hard NAV per share has grown at 10% CAGR while our fee generating AUM has grown 19% per year. These results have translated into returns for our shareholders with the stock compounding at 15% per year in U.S.
dollars over the same five year period. That completes my comments.
We would now be happy to take any questions.
Operator
[Operator Instructions]. Your first question comes from the line of Geoff Kwan with RBC Capital.
Geoff Kwan
Hi, good morning. Gerry you mentioned in your opening remarks talking about accelerated processes within the Onex Partners part of your business.
I am assuming you made that reference just that it's a bit more commonplace if you're actually referencing and just wondering is it just coincidence that you're running into these types of scenarios or is there something maybe a little bit more fundamental that maybe changing around sales processes for the types of deals that you look at?
Gerry Schwartz
I don't think so Geoff. I don't think it is a fundamental change.
I think that this business has certain amount of cyclicality to it and at a time when prices are very high, debts are very available, some of the more aggressive investment banker think they can and do get away with other things like compressing the timeframe. The other side of the GC Credit often now is easier and easier to get with fewer and fewer covenants, even no covenants.
So, it is a function of where the market is now.
Geoff Kwan
Okay and I know you are limiting what you can talk about with respect to the OP V fundraising but with the capital that you raised are you able to make an even just high level comments on activity from existing LP's and anything on potentially new LP's into the fold?
Gerry Schwartz
Emilie do you want to…
Emma Thompson
Hi Geoff it is Emma. As you said we can't go into much detail but I think we're very pleased with the strong support from our existing relationships along with some great new partners who supported us.
So, we obviously be able to give you a little more detail when things wrap up but the reoperate has been great.
Geoff Kwan
Okay, and just one last question I had was just within U.S. tax reform being announced.
Obviously we don't know whether or not it ultimately passed but now that we've got a more definitive piece of documentation are you able to kind of talk about what the positives and the negatives are as well as your best guess is the net net products [ph]?
Chris Govan
Hey Jeff, it is Chris. I guess we do have more definitive documentation.
Unfortunately I think its 500 pages out of each of the House and the Senate and we've got 20 odd portfolio companies. I think the short story is that we're monitoring things and looking at things and trying to make sure we're aware of things.
And obviously our portfolio company management teams are doing the same. But it really is too early to say you know which of our companies and whether overall we're sort of a net winner or a net loser.
I think importantly it will be sort of an industry wide issue if there is an issue. It's not as if there's something here that we believe is going to Onex in particular uncompetitive in finding great opportunity to invest our capital going forward.
Geoff Kwan
And maybe if I can just ask, my last in terms of a follow on question is, again assuming that the proposed tax reform passes as what's there, does that then maybe change how you think about strategically what industries you would like to invest because of the different nuances of tax reform?
Gerry Schwartz
Well, I don't think so Geoff. I do think that it's possible that tax reform could affect different industry differently.
I think what that's going to lead to is different valuations in different industries. And hopefully our ability to continue to participate in all of them maybe just with different metrics because the actual net cash flow being generated from those businesses which is what we focus on obviously may change over the long-term.
Geoff Kwan
Okay, thank you.
Operator
Your next question comes from the line of Paul Holden with CIBC.
Paul Holden
Thank you, good morning. Two additional questions on the proposed tax reforms; one, we already just proposed we don't know exactly, still be finalized and if they are finalized which way it will go.
But does it change your acquisition appetite at all in the interim?
Gerry Schwartz
So I might hand that over to somebody else but I can tell you that this is not the first time we've been in a situation like this. We do as we look at new opportunities do somewhat if analysis.
And so we are taking the time to build and this falls heavily on our advisors and Carlow [ph] internally alternative tax models around our acquisition opportunities so that we've got a sense in terms of call it the dispersion of outcomes. And I will say interestingly I haven't actually seen one of those this time around yet in terms of actually reviewing it but last time around with the initial Trump proposals there were -- again there were opportunities where we were going to end up with a better tax result and there were opportunities we were going to end up with a worse tax result.
So it is very company specific and capital structure specific. But yeah, we are thinking about that as we look at new opportunities as I'm sure everybody who's looking at those opportunities is.
Paul Holden
Okay, and then my second…
Chris Govan
Paul the interesting thing maybe that everybody will see pretty much will see and come to the same conclusions on tax changes and it should show up in the prices paid for companies, that all of them come out of the same thing. If you want an 18% return, you have higher taxes you know you have paid a lower price vice versa.
Paul Holden
Yes, no I agree and I guess kind of sort of my question on does it put a pause on activity in the time being. My second question on this then sort of along the lines of what Geoff asked but rather than a change in industry focus would it prompt you to maybe do more activity in Europe versus North America going forward, not saying no activity in the U.S.
but maybe more of a mix towards Europe?
Chris Govan
I doubt it. I think it comes back to what Gerry and Chris just mentioned.
If taxation in United States changes the character of cash flow then prices would follow. And as always the markets respectively will find their appropriate equilibrium and it is really too early to tell because the House and the Senate have both distinct billings and nobody knows how or whether or not those Bills will be successfully reconciled.
So, until we get a sense for that it is really tough for analysis.
Paul Holden
Okay, fair enough. Moving on from the tax questions, Gerry you mentioned some of the challenges in terms of investing capital.
On the flip side I guess that creates an opportunity in terms of harvesting capital, so maybe you sort of on the line could provide some thoughts on that angle?
Gerry Schwartz
It's true and if you look at the last three years we've done a lot of harvesting.
Paul Holden
Okay.
Chris Govan
The other thing too that is happening is the debt market is so hot that the opportunity to refinance and refinance a gain in the same year which is unthinkable is actually happening and available and we are doing something.
Paul Holden
Okay, got it. And then one final question, always I like to ask one question on one of your operating companies and I'll ask on Schumacher this time around.
Looks like EBITDA has been trending down since the beginning of the year, so just wondering going if you can talk to kind of the trends in that business and strategic progress?
Gerry Schwartz
Josh, you are on the line with -- why don’t you pick that up.
Unidentified Company Representative
Yeah, sure. Hi, it is Josh.
Consistent with the recent disclosure by many of the other hospital and hospital based physician services company, Schumacher has been operating in a more challenging industry environment this year. And in large part that has occurred because of the initial benefits to providers associated with the implementation and the Affordable Care Act have dissipated.
There the providers have seen some of the impact there and Schumacher in particular has been affected by a shift in customer mix primarily related to the trend of managed care companies exiting the ACA Exchanges which has impacted the company's average reimbursement rates and obviously the earnings profile which is what you see in the numbers.
Paul Holden
Okay, I will leave it there. Thank you for your answers.
Operator
[Operator Instructions]. That concludes our question-and-answer session.
I will now turn the conference back to Gerry Schwartz.
Gerry Schwartz
Thanks operator. Thanks everybody for participating in the call.
We appreciate your support. As always feel free to contact Emilie if you have any questions.
We look forward to speaking to you again next quarter. Thanks and bye.