Feb 26, 2016
Executives
Emily Lewin - Director, IR Bobby Le Blanc - Senior Managing Director Chris Govan - CFO
Analysts
Paul Holden - CIBC World Markets
Operator
Welcome to Onex's Fourth Quarter and Full-Year 2015 Conference Call. My name is Paula and I will be your operator today.
[Operator Instructions]. I will now turn the conference over to Ms.
Emily Lewin, Director Investor Relations at Onex. Please go ahead.
Emily Lewin
Thank you, Paula. Good morning, everyone and thanks for joining us.
We're broadcasting this call live on our website. With me today are Gerry Schwartz, who is joining us remotely, Bobby Le Blanc, Chris Govan and a number of our managing directors.
New this quarter, a synchronized slide presentation is included with our webcast to assist you as we cover the financial discussion. We trust you will find this to be useful.
As always, we welcome your feedback on our materials. Our 2015 and MD&A and consolidated financial statements are available on our website and have also been filed on SEDAR.
Our annual report includes the how-we-are-invested schedule. This is a good financial summary of our investments and includes Onex's capital on a per-share basis.
Our pro forma schedule of fees and expenses has also been posted to our website which should give you greater visibility into the revenue and expenses and our asset management platform and the parent Company. Before we get started, I just need to remind everyone 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 obligation or CLO, offerings.
We're required to remind you that these offerings are made solely to qualified institutional investors and to certain non-U.S. investors in 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.
Lastly, we would like to let you know that our annual investor day will take place in Toronto on June 14. Should you be interested in attending, please contact me for more details.
With that, I will turn the call over to Bobby.
Bobby Le Blanc
Thanks, Emily and good morning, everyone. I would like to spend some time today reflecting on 2015 and our activity so far this year.
But first, let's take a look at what we're seeing in the markets. 2016 started much like 2015 ended, with volatile credit markets, a difficult investment environment and a weak Canadian dollar, largely driven by steep commodity price declines and a shaken oil and gas sector.
The current instability in the markets has made it challenging to source and finance new investments. In some recent cases, we have seen considerable price gaps, with sellers holding on to the hope of receiving high valuations.
The weak capital market environment is a great reminder of why a consistent approach to investing is fundamental to longevity in our business. With plenty of dry powder, more than $2 billion of cash and nearly $3 billion of undrawn capital commitments and a great team of 80 investment professionals, we feel well-positioned to ultimately benefit from the current investment climate.
2015 was a productive year for us. Onex's private equity investments returned 12% during the year.
We invested close to $2.5 billion in 6 new businesses and 3 add-ons, of which Onex's shares was more than $750 million. As you would expect from us, each investment has a cost-saving element or is a platform for accretive acquisitions.
Europe was a particularly bright spot, with 2 new businesses purchased out of our London office. Our existing businesses also had a busy year, completing more than 40 follow-on acquisitions at accretive multiples, with an aggregate purchase price of approximately $1 billion.
Given the state of today's credit markets, we're pleased that we took advantage of their strength in the first half of 2015. A number of our businesses collectively raised or refinanced a total of $1.5 billion of debt.
As well, Onex and our partners received $1.2 billion of realizations and distributions, of which more than $300 million was Onex's share. We do have one pending disposition, the sale of KraussMaffei or KM, a leading manufacturer of plastic and rubber processing equipment based in Munich, Germany.
We acquired KM in late 2012 and, over the past three years, the Company has focused on various operational improvement opportunities such as enhancing procurement, relocating the company's manufacturing footprint and hiring new management. These efforts helped to produce a strong revenue growth and improved margins.
KM is expected to generate a gross multiple of invested capital of about 2 times and about $13 million of carried interest to Onex. We feel good about the businesses that we own today.
Of course, it is difficult to predict how long the capital markets will have an impact on our private equity business, both as a buyer and a seller. While we hope to add value every quarter, if market headwinds continue, as they have been lately, our equity markets will follow to varying extents.
Fortunately, our investment thesis are not predicated on broad market trends and our businesses for the most part are conservatively capitalized. I'm moving on to our credit platform.
In 2015, we enjoyed robust growth, with assets under management increasing by 30% to $6.5 billion. This growth was driven by 3 new U.S.
CLO issuances. Given the current credit markets, it won't come as a surprise that the U.S.
market for new CLOs is effectively closed. There was about $800 million of new CLOs issued in January this year which compares to just over $5 billion in the same month last year.
We have seen this before and, although it could take a bit of time, we expect the market to come back. As you will hear from Chris, Onex's investments in our credit platform have been weighed down by the mark-to-market losses in our CLO equity.
At the moment, it is an unrealized loss and, like all of our investments, we're focused on long term results. We still expect to achieve our model returns over the life of our CLOs.
Finally, we continue to evaluate opportunities to grow our credit business, just as we did with the creation of our CLO platform in 2012. We also continue to build our team.
Across the firm, we promoted 7 investment professionals, including Todd Clegg to Managing Director. We develop most of our own talent at Onex and believe this is one of the secrets of our long term success.
By the time someone is promoted to Managing Director, they have likely been with us for about 10 years. They have seen more than one investment cycle; the firm's values are deeply ingrained and they understand what kind of businesses we want to own.
Our next generation of MDs within Onex Partners and ONCAP, those promoted to MD in the last five years originated about half of our private equity transactions in the same period. This tells us our talent development is working.
Our distinctive ownership culture requires Onex management to have a significant stake in Onex shares and to make meaningful personal investments in everything we do. Today, our team has $2.1 billion invested in our shares, operating companies and credit platforms.
This financial alignment is critical to our culture and overall success. We all share in the risks and rewards of everything we own.
I would now like to hand it over to Chris.
Chris Govan
Thanks, Bobby and good morning, everyone. My comments today will focus on the two supplementary schedules that Emily mentioned earlier, how we're invested and the pro forma schedule of fees and expenses.
First to the how-we-are-invested schedule, where very little has changed on a quarter-over quarter basis. The total value of our Onex Partners private investments was effectively unchanged, ending the year just over $2.5 billion or a net $20 million increase since September 30.
Onex received approximately $70 million of distributions from these investments in the quarter, so that $20 million net increase actually includes $90 million of value creation or an almost 4% return in Q4. This result was driven by an increase in the KraussMaffei mark to reflect the net proceeds from the sale which we expect to close sometime later in the first half of this year.
The value increase also impacted Onex's unrealized carried interest which closed the year at $178 million, up $18 million in the quarter. At ONCAP, the value of our investments was $381 million at year-end, up about 3% in the quarter as a result of overall increases in the underlying marks.
Turning to credit, there was an $86 million decrease in our investment there which was made up of three pieces. First, a $20 million net decrease in capital allocated to CLOs.
When CLO-10 closed in October, our equity investment was about $20 million less than the distribution we received from the warehouse being closed out. Second, $16 million of regular distributions from our CLOs.
And, third, a $50 million mark-to-market loss in Q4. This mark-to-market loss was principally related to our CLO investments, whose marks continue to reflect the weakness in the underlying loan market and some incremental volatility due to the structure's leverage and the relative illiquidity of the CLO equity market.
This is the second quarter in a row where CLO investments have generated a mark to market loss, with a cumulative unrealized loss standing at $106 million at year-end. Although we certainly would have preferred not to have seen these marks fall, we're long term investors in CLO equity.
We're focused on the CLOs' cash flows and the underlying defaults. And, in that regard, things remain on track.
All of our CLOs are comfortably on side their various coverage [indiscernible] and Onex received $53 million of distributions last year on $315 million of invested capital. If the ultimate cash flow is from our CLOs' approach, those we originally modeled which I think, as Bobby mentioned, is what we expect, the $106 million of unrealized losses will reverse and contribute to overall NAV growth going forward.
When I look at the year-over-year changes on the schedule, I note a couple of things. Our year-end invested capital and private equity stood at $3.3 billion or 55% to total capital.
And that is up from 42% at the beginning of the year. This net increase of about $800 million reflects a 12% annual return on our capital and, importantly, a meaningful amount of capital put to work in the year, principally in SIG, Survitec, Jack's and Schumacher.
As you would expect, this investing activity also drove a significant change in our cash balance which closed the year at $2.1 billion or 36% of total capital. That is down from about 48% at the start of 2015.
Although we're quite happy to have a significant amount of liquidity at this time, we're also happy to have deployed a meaningful amount of capital last year, positioning Onex for stronger NAV growth going forward. While the how-we-are-invested schedule provides a good summary of Onex's investing activities, it does not reflect the value of our asset management activities.
Onex manages over $22 billion of capital, approximately $16.5 billion of which is committed by our fund investors. The pro forma schedule of fees and expenses is one measure of the contribution that these asset management activities make over and above the return on Onex's invested capital.
This schedule compares our asset management revenues to the total cost of running Onex and it includes pro forma fees and carried interest on the $4 billion-plus of capital managed on behalf of Onex shareholders. As a reminder, the pro forma amounts assume that Onex Corporation's capital is subject to the same fee structure as our institutional limited partners.
As such, this schedule reflects the full scope of our asset management platforms and, we think, is useful when trying to assess the value of those businesses. In comparing the year-over-year results on this schedule, several items merit some discussion.
Aggregate private equity management fees were $144 million last year, up $52 million or 57%, from calendar 2014. As we have mentioned in previous calls, this was the result of Onex Partners IV, from which we began calling fees in August of 2014.
The current run rate management fees are $127 million which includes $35 million of pro forma fees on Onex's capital. The increase in management fees was more than offset by the impact of fewer realizations last year.
With record realizations in 2014 and almost no carried interest realized in 2015, the year-over-year impact was significant. The associated changes in carried interest and variable compensation combined to create a net $235 million year-over-year decrease in the PE managers contribution.
Overall, our private equity asset managers contributed $58 million last year. If you look at the last three years, these platforms have had an average pro forma contribution of $163 million.
As a reminder, we include carried interest in this schedule on a realized basis and, as such, the carry reported here will always be lumpy. Although realized carried interest in 2015 was nominal, Onex's unrealized carried interest on other investors' capital grew by $63 million last year.
While this accrued amount will not be recognized in the schedule until actually realized, my point here is that carried interest was a meaningful source of value accretion creation for Onex shareholders again last year. Stepping back, you will see the total contribution from Onex and its asset management platforms in 2015 was $42 million.
Looking at the last three years, the total contribution averaged $143 million per year. Finally and before we open it up to questions, an update on our stock buyback program.
In 2015, we repurchased approximately 3.1 million shares for CAD218 million or an average cost of CAD7.70 per share. So far this year, we repurchased approximately 1.4 million additional shares for CAD114 million or an average cost just under CAD83 per share.
Since we began buying back stock in 1997, Onex has repurchased almost 87 million shares at a cost of CAD1.8 billion. Buying back Onex stock has been our largest and perhaps one of our best investments.
That completes my comments.
Operator
[Operator Instructions]. Your first question comes from Paul Holden of CIBC.
Paul Holden
A little bit of a broad question to start with. You disclosed that you grew the value of your private investments by 12% over the last year which is quite a good number in a challenging economic environment.
When you think about how you're able to drive that 12% return, do you think it is reasonable to assume roughly the same type of return in 2016?
Bobby Le Blanc
Look, our goal is to compound our net worth by 50% a year. In any given year, it will be higher, lower or different, but that is the goal.
The economy is a little bit slower today as we look at our portfolio of companies than we have seen over the last couple of years, but we feel pretty good about what we own and the relative position of our businesses but we don't have a prediction of how we will compound this year.
Paul Holden
In terms of the CLO investments, you provided a bunch of commentary there. The specific question would be on default rates.
In past quarters, you have indicated zero defaults in the leverage loans you own. I wonder if that is still true.
Unidentified Company Representative
We have had four defaults overall of our CLOs over 220 names. So it is a relatively low default rate.
Paul Holden
So 400 out of 220. Okay.
Unidentified Company Representative
On an annualized basis, it's less than 2%.
Paul Holden
Right. So it is a pretty good number.
Based on industry data we're reading, it seems like the default rates for everyone are ticking up. Michael, would you say that is kind of the trend you are seeing in your portfolio as well, it is slowly kind of ticking up?
Unidentified Company Representative
As we sit here today, we don't really see many more defaults on the horizon over the next few months. So we're actually feeling pretty good about the portfolios.
Paul Holden
And then, I guess a related question is just, you used to provide a line item on the schedule of fees and expenses, call it treasury and other income. Which provided or at least included, returns on some of the other credit strategies.
Just wondering what that treasury and other income might have looked like for 2015, if you can provide that number or if not, maybe some commentary around the returns you are generating in those credit strategies.
Chris Govan
In the fourth quarter, the treasury income that is on our cash and near cash with a loss of $10 million. For the year, I was earning the $1 million.
And, again, that loss is the result of mark-to-market losses in the unleveraged senior fund that we have some of our near cash in with Onex credit. But the yield on that fund, the current yield on it, is just under 4% and the yield to maturity is just under 5%.
So, again, if we're holding that [indiscernible] maturity and are to experience defaults, we're expecting better performance from the treasury next year.
Operator
[Operator Instructions]. This concludes our question and answer session.
I will now turn the conference back to Mr. Bobby Le Blanc.
Bobby Le Blanc
Thanks, everybody, for participating on the call. We appreciate your support.
Please feel free to contact Emma or Emily if you have any questions. We hope you all have a nice weekend.
Goodbye.
Operator
Thank you for participating in today's conference. This does conclude the call.
You may now disconnect.