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spk01: Welcome to ONIC's fourth quarter and full year 2020 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session with pre-qualified analysts. At that time, if you have a question, please press star 1 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star then 0. As a reminder, this conference is being recorded. I will now turn the conference over to Jill Hominick. Managing Director, Shareholder Relations and Communication at Onyx. Please go ahead.
spk00: Thank you. Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Jerry Schwartz, our founder and CEO, Bobby LeBlanc, Onyx's president and head of Onyx Partners, and Chris Govan, our chief financial officer. Earlier this morning, we issued our fourth quarter and full year 2020 press release, MD&A and Consolidated Financial Statements, which are available on the shareholder section of our website and have also been filed on CDAR. Our supplemental information package is also available on our website. As a reminder, all references to dollar amounts on this call are in U.S., unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward-looking statements contained in today's presentation and remarks. I want to let everyone know that ONIX is planning to host an Investor Day this fall. We'll provide more information in the coming months. With that, I'll turn the call over to Jerry.
spk02: Thank you, Jill, and good morning, everybody. Year-end is always a natural time for reflection. As I think back to this time last year, it would have been hard to imagine the events that followed. In fact, I simply couldn't have. Even with those challenging conditions, the one constant for Onyx has been our discipline as a long-term investor. We've endured cycles and disruptions by remaining focused on our core principles, grow meaningful relationships, dive deep into the industries we cover, and build a diversified portfolio. A year like 2020 highlighted the importance of maintaining that discipline. Bobby and Chris will provide more details on our results, but first I'll comment on highlights for the year. 2020 was indeed an active year for ONIX, with each of our platforms executing on value creation strategies, and I must say long-term value creation strategies. In private equity, We had a successful year of realizations and deployments, and overall fund performance is tracking quite well. Our portfolio companies have, for the most part, weathered the pandemic thanks to strong, proactive management. Many are seeing benefits even in this new environment. Those more adversely affected, often businesses dealing with the direct impact of government-imposed lockdowns, continue to have strong value propositions that will support their success as the recovery accelerates. Generating gross private equity returns of 24% in a year like 2020 is plenty of evidence of our ability to create value in all environments. Throughout last year, Onyx Credit, and I'll now talk a bit about Onyx Credit, continued to build out its platform and product offering, positioning it for future growth. Credit attracted strong talent to its team and has had early success with new strategies. With the acquisition of Falcon Investment Advisors, we now have capabilities and a proven track record across our entire credit platform. as well as comprehensive, integrated, go-to-market strategy. I am confident in the credit team's ability to deliver positive returns on the investments we have made and will continue to make this year. At Gluskin Chef, Onyx products continue to drive interest from their clients. With close to $800 million in allocated to ONIX credit and private equity strategies at year end. The benefit of being able to offer a more diverse product range was a core assumption behind our acquisition, and we've been pleased with the response. At ONIX itself, our people have always been the driving factor of our success. Throughout 2020, we added to our team in strategic and growth areas, strengthening the breadth of our experience and the depth of our talent. We've worked hard and delivered a year of results and achievements that we can all be proud of. The appointment of Bobby to president of Onyx was also a major milestone in 2020. Bobby has the leadership, financial, and operational acumen to continue to drive our organization forward. I'm incredibly pleased with what he's accomplished so far. Finally, I would like to thank you, our shareholders, for your continued support, especially in a difficult year. One of ONIX's other founding principles, which is core to our culture, is the alignment that our team has with you. We continue to see incredible value in ONIX as an investment and great potential in the businesses we've built to drive long-term, sustainable earnings, creating value for all of us for years to come. With that, let me now turn it over to Bobby.
spk04: Thank you, Jerry, and good morning, everyone. Q4 was another strong quarter for ONIX, contributing to an overall good year. we reported net earnings per share of $6.61 for Q4 and $7.63 for the year. Total segment net earnings per share were $7.72 for the quarter, up 43% from Q3, and $8.95 for the year, up 11%. We ended the year in a solid position, with investing capital per share up 18%, our strongest year of invested capital growth since 2013. These results speak to the diversification and resiliency of our overall portfolio and our ability to successfully navigate challenging market conditions. As global economies continue toward a more robust recovery, we see opportunities across our investment platforms. We had a productive year in private equity, with our funds realizing approximately $2.7 billion and deploying approximately 2.5 billion. With deployment, we were able to drive opportunities through deep industry knowledge and long-term relationships. At Onyx Partners, Fund 5 is slightly ahead of pace at more than 50% invested, including our recently announced investment in WeldNorth Education. WeldNorth is the market leader in digital first curriculum for K-12 schools. The increasing use of technology in these schools is a core theme for our software and business services vertical. We followed Jonathan Greyer, Weld North CEO, and the company for a number of years. With the benefit of our experience with PowerSchool, we have a differentiated lens which allowed us to thoroughly evaluate the opportunity as a value-added investor. Gross private equity returns for ONIX were 14% in the quarter and 24% for the year. Importantly, OP4 ended the quarter with a net IRR of 8%, putting it in a carry position for the first time. OP5 also triggered carry this quarter, although obviously its future carry position will be impacted by ongoing capital deployment and investment performance. Based on the current marks, our PE platforms now have accrued carried interest attributable to ONIX of $87 million, an increase of $54 million in the quarter. Chris will provide more information, particularly on OP4 carry, in his remarks. Incorporating more direct operational expertise within our private equity team has been an important strategic priority. Earlier this year, we announced the appointment of Wes Pringle as the head of portfolio operations for Onyx Partners. Wes brings significant operating experience and will play an important role in both the due diligence of new investments and execution of operational improvement opportunities. Wes will also join the Onyx Partners Investment Committee, and he and I will work closely together in further developing our operations capabilities. Before moving to credit, I wanted to touch briefly on private equity fundraising. As a reminder, raising successor funds can begin once our current funds are 75% invested. As I mentioned earlier, OP5 is now at just over 50% invested. ONCAP4 is approximately 70% invested. Therefore, subject to pace of deployment, we'd expect to be in the market with our next ONCAP fund later this year and ONIX partners by the end of 2022. Onyx Credit continued its momentum in Q4, increasing assets under management and deploying new strategies to drive future growth. Fee generating AUM was more than $15 billion at year end, including our acquisition of Falcon. Excluding Falcon, fee generating AUM grew 10% for the year. We issued four new CLOs and made good progress with other strategies across the platform. We are currently in the market with two credit strategies, and we would expect to launch two more in the second half of the year. With the investments we made in 2020, we now have the capabilities in each of liquid, opportunistic, and private credit investing. The platform is now well positioned to drive future growth and management fees and carry. Recently, we've been communicating to shareholders that we intended to provide additional information on performance expectations throughout 2021 and beyond. For ONIX credit, we expect fee generating assets under management to grow in the range of 25 to 30% this year, leading to an increase in 2021 exit run rate management fees of approximately 10%. In credit, unlike private equity, assets only generate fees upon investment. so fees will increase as more capital is deployed. As we look ahead to 2022, we expect further AUM growth for Onyx Credit of approximately 15 to 20%. As you heard from us on the Q3 call, given the upfront investment we made in 2020 to build out the Onyx Credit team, we continue to expect margins to be muted in the short term. With the level of AUM growth we're now projecting, we anticipate a return to a more normalized 40% margin for the business within the next three years. With the majority of the new AUM also providing a carried interest component, there will be an additional upside to ONIX's overall economic return. We see strong potential with the ONIX credit platform, and we are confident in the team's ability to deliver enhanced returns going forward. Within wealth management, as Jerry said, we continue to see more Gluskin Sheff clients investing in ONIX private equity and credit products. Within the quarter, we saw approximately 190 million of Gluskin Sheff client capital allocated to ONIX's strategies. As we look ahead, we expect to see further integration within our investing teams, particularly where we identified enhanced collaboration and information sharing opportunities. Overall, we feel positive about our ability to drive value across all of our platforms. With our strong balance sheet, we continue to have the flexibility to meet our private equity commitments while also investing in other areas to grow future earnings. Finally, to echo Jerry's comments, I would like to take this opportunity to thank all of our shareholders for their continued support. I would also like to thank our employees who have managed through a challenging year with the commitment and entrepreneurial drive that is core to our success. With that, I'll pass it over to Chris for more on the financials.
spk03: Thanks, Bobby, and good morning, everyone. Onyx's results in Q4 continue to reflect the strength and diversification of our investments, the ability of our portfolio companies and their management teams to navigate the pandemic, and the underlying improvement in the financial markets. with the S&P 500 up over 12% and the CS Leverage Loan Index returning nearly 4% in the quarter. Let's start by looking more closely at ONIX's PE portfolio. Q4 included a net mark-to-market gain from private equity of $483 million, bringing the total contribution from private equity to $731 million for the year. This performance now reflects consecutive quarters with gross quarterly returns of 14%. And as you heard from Jerry and Bobby, brings us to a full year gross return of 24% from private equity. This next slide details the allocation of the 38 separate businesses that comprise Onyx's PE portfolio by industry segments. we experienced double-digit returns across pretty much all of our industry segments in the quarter. The strong performance reflects a continued recovery in the financial markets and was led by our events and leisure and aerospace and defense investments, two of the industries that were most directly impacted by COVID. Increases in valuations can largely be attributed to the market and our businesses having better visibility on a return to more normal operations following the rollout of vaccines and some lifting of government restrictions. However, it's worth noting that our valuations generally anticipate a bumpy return to normal that will stretch beyond 2021. When we pivot and break down our PE portfolio by COVID exposure, we see a strong recovery of the directly exposed businesses. These seven businesses were up 40% in the quarter, and also had the largest dollar contribution to investing earnings. As a result, the group recovered most of the ground it lost during the first half of 2020, finishing down just 3% in the year. On a similar note, the businesses that we've identified as facing demand and or supply headwinds in the current environment also saw double-digit improvement in the fourth quarter, having fully recovered the value lost earlier in the year and ending the year up 2%. Finally, and equally important, is the nearly 60% of ONIX's PE exposure in businesses where we believe the pandemic has either a low or positive impact. This group continued to contribute value, up 7% in Q4 and finishing the year up over 50%. These businesses should continue to provide ONIX a hedge against COVID-related headwinds in the near term. Our credit investments had meaningful mark-to-market gains in the quarter, up 21%, taking us into positive territory for the year with a 7% return. The increase was primarily driven by a strengthening of the underlying leveraged loan market with the index returning 2.8% in Q4. As we discussed last quarter, the COVID-related impacts on the underlying loans means we no longer expect our pre-COVID CLO investments to reach the low double-digit IRRs we targeted. Rather, the mid to high single-digit returns we signaled in Q3. However, we do expect these CLOs to provide a meaningful positive return overall and certainly attractive returns from their current marks. Looking back on the year, we deployed $57 million in four new CLOs, which we expect will provide strong risk-adjusted returns, as well as a predictable stream of management fees on 1.5 billion of associated AUM over the coming years. Overall, shareholder capital per share was up over $11 from December 2019, driven by an 18% increase in investing capital per share, which, as Bobby mentioned, is our strongest year since 2013 in that regard. In absolute terms, shareholder capital was up only $226 million, or 3%, reflecting $444 million used to repurchase 9.8 million ONIX shares, nearly 10% of the SVS outstanding at the end of 2019. We were able to purchase these shares at an attractive discount throughout the year. As I showed you in previous quarters, that discount was substantial, especially when giving full value to our cash and publicly traded investments. On that basis, our repurchases consistently implied a discount to the private investments north of 50%. For the full year, Onyx's realizations totaled just over $870 million from private equity, primarily from secondary sales of SIG and Clarivate. And our credit investments returned over $100 million, including $76 million of regular quarterly CLO distribution. On the investing front, ONIX has put nearly $670 million to work in PE since the beginning of the pandemic, about half of which was deployed in Q4, including $136 million for an incremental investment in Convex and $200 million for OneDigital. With the announcement of Wealth North on the first of this month, our investment pace has continued into 2021. Onyx expects to invest $275 million in Wealth North, which includes a co-investment of about $100 million. Next, I'll spend a few minutes on the asset wealth management segment. It generated net earnings of $99 million, or $1.07 per share in Q4, and $87 million, or 90 cents per share for the year. The year-over-year increases in net earnings, both in the fourth quarter and the full year, were driven by PE. In particular, a marked improvement in carried interest as we began to accrue carry in OP4 and OP5. I'll go into more detail on the OP4 carry on the next slide, but needless to say, We're excited that the performance we've seen in the fund over the last couple of years as investors is now contributing to the asset manager's earnings. I'll also reiterate Bobby's earlier comment. With OP5 being about 50% invested, and much of that having been invested over the past year or so, we expect carried interest from OP5 to fluctuate while the fund matures. The improvement from carried interest was partially offset by a reduction in PE management fees, which trended down as realizations reduced the fee basis in our fully invested funds. The credit manager contributed $3 million in Q4, continuing to reflect the upfront investments we've made to build out the team and position the platform to meaningfully grow outside of CLOs and senior loans. As you heard from Bobby, we expect margins to improve in the coming years as these investments bear fruit. In wealth management, the net contribution decreased by $5 million year-over-year. In addition to investments we've made, earnings were impacted by lower AUM and lower management fees as we aligned rates to be more competitive. Lastly, Before turning the call over to Q&A, I want to drill down a bit on the OP4 carry. Let's start with the fundamentals. For the GP to begin accruing carry in a fund, the LPs need to be earning at least the preferred return, which for all our PE funds is a cumulative 8% net IRR. This is referred to as the hurdle rate. With a net IRR that broke through the 8% threshold in Q4, we are just beginning to accrue carry in OP4. If the value of the remaining portfolio falls or doesn't grow sufficiently to maintain a cumulative net IRR of 8%, the 11 million of carry accrued at December 31st would reverse. On the other hand, beginning to accrue carry also means that there's a lot of upside as we build on that 8% net. As a result of the catch-up mechanism in the funds, 80% of the value we generate for our LPs above the hurdle rate will accrue as carry until the GP has been allocated 20% of the LP's cumulative net gains. Since ONIX is entitled to 40% of the carry, this means that 32 cents of every incremental dollar of value on LP capital in OP4 will accrue to ONIX in the near term. The next slide illustrates this point. There are $2.7 billion of OP4 LP capital in the ground at December 31st, with 11 million of carry accrued to Onyx Corporation. In order to maintain our current carry position, we need to generate about $220 million of value on the capital in 2021, a return of 8% on that 2.7 billion. But as I said earlier, For every dollar of value above that threshold, 32 cents of carry accrues to ONIX while we're in the catch-up zone. So if instead of 8%, OP4 returns 15% to 20% on the LP capital in 2021, ONIX Corporation would accrue additional carry of about $55 to $100 million in the year. This, of course, is only an illustration. However, we think it's important to remember the potential for outsized increases in carry as we move through the catch-up in OP4's waterfall. We hope that OP4 continues to perform in 2021 and generates additional value for our LPs and carry for ONIX shareholders. So with that, I'd now be happy to take questions.
spk01: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Now, our first question comes in the line of Jeffrey Kwan from RBC Capital Markets. Your question, please.
spk05: Hi, good morning. My first question was just how you would talk about the deal pipeline today, but also, too, on the monetization side, how you think about potential opportunities in your portfolio given the market environment as it is today.
spk04: Hey, Jeff, it's Bobby. Hope you're well. The pipeline, I'd say, is still, from a volume point of view, weaker than normal. But the quality of what we're looking at is pretty good. I think some of that is just the market. I think some of it's also when we changed our approach to go to market for OP, we've become much more thematic and pointed in terms of the opportunities that we're looking at. But the ones we are looking at now are quite good and have good actionability. Hopefully, we'll have some good actionability. Again, we don't talk specifically about individual monetizations, but obviously, we're always looking at our portfolio and asking ourselves what should be monetized and what shouldn't be. We have normal hold-sell discussions on each portfolio company throughout the year. And obviously, there's been different ways we could look at exiting some of our portfolio, including the recent uptick in SPACs, which we've noticed, and we get a lot of inbounds on those from a monetization point of view.
spk05: Okay. And then, you know, I know kind of when you look at the NAB, it's you know, well-diversified, there's no obvious concentration risks. But when you think about your larger investments, and if we assume that gradual improvement in the economic environment over the next year, you know, what would you say be, you know, let's say the three investments that you think could be relative of performers in this context?
spk04: Oh, it's hard to say. Again, you have to ask yourself, is it risk-adjusted returns versus absolute returns and things like that? But certainly... Like a convex, for example, the backdrop of the insurance market and reserve strengthening that we're seeing in the pricing environment, there certainly could be upside there over the intermediate term. Power School and more recently, Weld North, I think just in terms of K-12 education and the stimulus dollars being deployed against that platform makes us very excited about the longer-term prospects, and they're both reasonably-sized big checks. But we're kind of across the whole portfolio. Those are just a couple of highlights of things that could go well, but every dollar matters, and we're focused on the whole portfolio.
spk05: Okay. Thank you.
spk01: Thank you. Our next question comes from the line of Scott Chan from Candid Core Genuity. Your question, please.
spk06: Good morning. Maybe, Bobby, just to follow up on Jeff's question. In 2020, I think the deployment and the realizations were about even for ONIX. So if we look out into this year, you know, how would you think that played out? Do you think realizations would be larger than deployment opportunities?
spk04: It's so hard to predict. Like, it really is. It depends on what comes through the pipeline, what's actionable, you know, what the demand looks like for some of our portfolios and our value creation plans. So I really would be reluctant to try to predict that. It kind of falls out. It is what it is. Sometimes the market's better for disposition, sometimes it's better for acquisition. In the case of last year, it was sort of equal, but it's very hard to predict.
spk06: Okay, fair enough. And then... So you talked about convex, and I think you mentioned that OP5 is in an accrued carry position. So does that imply right now that collectively that fund is at a hurdle rate on a net IRR basis?
spk03: Yeah, hey, it's Chris. Hi, Scott. That's correct. OP5 is above the hurdle rate and therefore accruing carry on a mark-to-market basis. Just to reiterate what I said in my scripted comments, it's only half invested. And so as we put additional capital to work, you know, that new capital can have a pretty significant impact on the cumulative IRR, both positive or negative, right? And so I think what you should expect is that there could be some real fluctuation, you know, quarter to quarter until the investments are a little bit more matured and you don't expect the IRR to be fluctuating quite so much.
spk06: And just lastly, Chris, now that the fund is 50% invested, when do you expect to start reporting the fund's performance on a quarterly basis? And then just as clarification, does the fund need to be OOP 5? Does it have to be 70% or 75% invested? I just missed that before you start fundraising for the new funds.
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