ONEX is one of the largest and most successful private equity firms in the world.  They manage approximately 7Bn of their own capital and now ~19Bn in third party capital.  By their own calculations over the last 30 years their gross returns have averaged a 2.8x exit multiple and a 28% IRR on “realized, substantially realized and publicly traded investments”.   Net of all corporate costs, investors in ONEX would still have compounded at 16.5% in the 31 years since their IPO.

For most of its history ONEX was a publicly traded conglomerate, which traded at a discount to NAV due to the very real drag of corporate costs (mgmt. fees and carried interest being basically charged to the shareholders).  Starting with the launch of Onex Partners in 2003, the company has increased its third party capital which pays fees into ONEX, initially offsetting compensation to management and providing a fee income stream in addition to investment returns.    ONEX now has 19Bn in fee generating assets which contributed $147MM in management fees, and ~70MM in carried interest over the last 5 years (LTM was 71MM).  There is also an additional 2Bn of committed capital which will one day pay fees.   The company’s strategy is to continue to grow this fee stream, which has grown at 19% over the past 5 years.  This fee stream, plus ONEX’s long term track record of strong capital allocation should result in a stock that trades at significant premium to NAV, it currently trades around NAV.

The 4Bn in investments breaks down further into 2.5Bn in Private companies, 900MM in public companies (Jeld-wen, Emerald Expositions and Celestica), 400MM in middle market companies (ONCAP), and 200MM in unrealized carried interest.  The credit book consists primarily of CLOs and the cash& Re is almost all cash save for a 200MM investment in the Flushing town center.

The private investments are by their nature difficult to value, but there are a few facts which help get us comfortable:

1)      They are marked close to cost.  The total value of Onex private companies and ONCAP at NAV is $2.9Bn The “at cost” value of their “significant private companies” is $2.2Bn (they have also cumulatively distributed 2.2Bn from these companies).    As they have exited investments recently, these exits have generally coincided with upward revisions to NAV rather than downward revisions.

2)      Incentives:  The management team that marks the NAV is required to reinvest 25% of all Onex Partners carried interest and incentive distributions in Onex shares until they individually own at least one million shares and must hold these shares until retirement.   This gives them an incentive to not overstate NAV while they are net buying shares and they have been:

3)      Actions: Management has been a long term believer in their own book/marks and acted to repurchase shares at/above NAV.  Management collectively owns 16% of the company, or ~$1.2Bn.  Over the last 15 years they have bought back ½ the company shares and their most recent large repurchase was in early 2016 at prices only ~10% below current levels:

Risks

Leverage: the underlying PE investments are by their nature extremely levered (range is 3-9x, average around 5.5x-6x LTM)  somewhat offsetting this is the fact that $1.9Bn (or ~25% of the NAV/market cap) sits as a cash cushion to fund commitments to its funds allowing them to take advantage of a downturn.

Control: OCX has two share classes, the controlling class of shares which entitle Mr. Gerald W. Schwartz to elect 60% of Onex’ Directors and to 60% of the total shareholder vote on most matters. These shares have no entitlement to distribution on wind-up or dissolution above their nominal paid-in value and do not participate in dividends or earnings and the SVS. SVS shareholders are entitled to elect 40% of Onex’ Directors and to 40% of the total shareholder vote on most matters. These shares are the only class of stock that economically participates in Onex Corporation.