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spk02: Welcome to ONIC's first quarter 2021 conference call and webcast. 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 call is being recorded. I will now turn the conference over to Jill Hominick, Managing Director, Shareholder Relations at Communications 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 of Bobby LeBlanc, ONIX's president and head of ONIX partners, and Chris Govan, our chief financial officer. Earlier this morning, we issued our first quarter 2021 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. With that, I'll now turn the call over to Jerry.
spk01: Thank you, Jill. Hi, everyone, and thanks for joining us today. ONIX delivered strong first quarter results, extending our recent momentum. Investing capital per share, sometimes referred to as net asset value per share, grew for the fourth straight quarter, ending the quarter at US$78.33. Private equity results were good, with both OP4 and OP5 continuing to generate positive returns. ONIX Credit is also seeing progress with its new strategies, which will drive AUM growth. We continue to see meaningful value in ONIX as an investment and great potential in our businesses. Bobby and Chris are going to give you more detail on our performance. As we look at the operating environment, although we know there are still challenges and opportunities to come, we feel renewed confidence that brighter days are ahead. With the economic recovery accelerating in much of the developed world, we continue to see strong value propositions across our portfolios. Over the past year, we've made a number of strategic additions at ONIX, investing in areas to support future growth. We've also invested in areas that we know are critical to our partners and stakeholders, definitely including our shareholders. These include diversity, inclusion, and ESG. We've been a successful investor for over 37 years by being a responsible investor. Today, we're adding more structure and intention behind these various initiatives. As an example, Bobby's going to talk to you about our D&I Leadership Council. How we operate is very defined by our shared values. These include entrepreneurship, intellectual honesty, an ownership mentality, and respect. These are the values that influence everything we do as a team in business, and we look forward to sharing more with you about these values and our progress at our upcoming Investor Day on September 30. With that, now let me turn it over to Bobby for more on the quarter. Bobby?
spk03: Thanks, Jerry, and good morning, everyone. Earlier today, we reported in segment net earnings per share of $5.12. and net earnings per share of $4.59. It was another strong quarter for ONIX, with good progress across key financial and investment performance measures. Investing capital per share was up 7% from Q4. Since year end 2019, before the pandemic began, investing capital per share is up 26%. Our business units have weathered the pandemic well, and we're seeing good performance across our investments. Crow's private equity returns for ONIX were 8% in the quarter. ONIX partners 4 and 5 returned 10 and 6% respectively, and our on-cap funds returned a collective 13%. Based on our current marks, our PE platforms now have unrealized carried interest attributable to ONIX of $183 million, an increase of $96 million from Q4. As Chris will discuss in further detail, this increase is largely due to OP4 being in a catch-up position this quarter. Over the last 12 months, Onix partners made five investments, each within one of our core industry verticals, which are industrials, business services and software, healthcare, and financial services. In all five instances, we identified various opportunities to add meaningful value. We'll continue to see quality at bats within our current pipeline, With our targeted focus, our pipeline is more concentrated on high conviction investment opportunities that are squarely within the themes we follow. As we mentioned last quarter, with ONCAP 4 now 70% invested, we'd expect to be in the market with our next ONCAP fund later this year, followed by Onyx Partners, which is expected to fundraise in the latter half of 2022. Within Onyx Credit, We're seeing positive momentum with the new strategies that we outlined last quarter. AUM growth will accelerate throughout the year as we close on more third-party capital. We recently announced the pricing of our 21st U.S. CLO, raising approximately $510 million. Consistent with our strategy to make the CLO business less capital-intensive, two-thirds of the equity was purchased by third-party investors, similar to our last U.S. CLO. Across our teams, we're benefiting from stronger integration and knowledge sharing. As an example, with 150 investment professionals in both private equity and credit, the teams regularly leverage each other's expertise and sector's views in evaluating investments. Last quarter, we spoke specifically about increased collaboration between the investment teams of Onyx Credit and Gluskin Chef. We continue to formalize that relationship with both investment teams now reporting to Jason New, our head of ONIX Credit. The Gluskin Chef Client Wealth Management Team remains focused on forging and building client relationships. Client assets at Gluskin grew 4% in the quarter, with good client inflows driving stable net assets. ONIX strategies continue to generate interest from Gluskin clients, with $860 million now invested in our products. an increase of almost 10% in the quarter. Overall, we feel confident with the team's progress and expect to see positive net flows for the remainder of the year. ONIX is also making advancements with organizational initiatives that we know are important to our shareholders, clients, communities, and employees. While diversity and inclusion has always been core to our culture, we recently added organizational infrastructure with the formation of a D&I Leadership Council, which I co-chair with Jill Homnuck. The Council has representation from every group within ONIX. Our approach incorporates the principles we've always believed in with an enhanced commitment to achieving measurable outcomes. Separately, we're also expanding our ESG program and look forward to sharing more with you throughout the year, including a near-term announcement of a new head of ESG for ONIX. Overall, I'm pleased with the progress we're making in the position we're in. As we look ahead, we see good potential from the investments we've made, both within our portfolios and across our team. As Jerry mentioned, we look forward to our investor day on September 30th. It'll be an opportunity to provide our shareholders with more detail on our business strategies and future performance expectations. With that, I'll turn it over to Chris.
spk04: Thanks, Bobby, and good morning, everyone. We had a solid start to the year. with segment earnings of $5.12 per share, largely reflecting the continued strength and diversification of our portfolio, which drove both our investing and asset management earnings, our portfolio companies and their management team's ability to navigate the evolving landscape, and an underlying improvement in the financial markets, with the S&P 500 up 6%, and the CS Leverage Loan Index returning 2% in the quarter. I'll start by looking more closely at ONIX's PE portfolio. The quarter included net gains from private equity of $269 million, reflecting an underlying 8% gross return. These private equity results continue the trend of steady gains since the lows reached at the outset of the pandemic. with ONIX's private equity portfolio returning 63% gross over the last year. If you go back a quarter further so as to eliminate the COVID bounce back, ONIX's gross return from PE is still an impressive 34% over those 15 months. With 39 separate businesses across eight key sectors of the economy, the diversification of our portfolio has been an important part of the story including during this past quarter. Although all industry segments contributed positively to Q1 returns, performance was led by the segments that were hardest hit by the pandemic. We saw these businesses start to turn a corner, particularly in economies that are beginning to reopen, and market valuations followed suit. These valuations reflect an underlying rotation in the equity markets that is highlighted when we pivot and break down our PE portfolio by COVID exposure. The seven businesses directly impacted by the pandemic returned 16% gross in the quarter, completing the recovery of ground loss during the first half of 2020 and finishing up $105 million, or 12%, from pre-pandemic levels. In fact, all of our industry segments now reflect positive returns from December 2019 marks. We continue to watch the pace at which vaccines roll out, economies reopen, and ultimately a new normal emerges. These factors will drive continued improvement in the directly exposed businesses. Along the way, the portfolio company management teams, in partnership with our investment professionals, will continue to adapt to the changing landscape. Overall, Q1 was a very good start to the year in PE, and we expect to build on this throughout 2021. Turning now to credit investing. Our credit portfolio returned 7% in the quarter, reflecting continued strength in the underlying loan market with that index returning 2%. These results include $41 million of net gains from CLOs. ONIX's CLO investments have now returned 16% from their pre-pandemic marks. And despite significant market volatility early in 2020, all our CLOs stayed on side their covenants and ONIX continued to receive regular quarterly distributions. The market turmoil of 2020 serves as a good reminder of the benefit of non-mark-to-market covenants and the resulting resilience that attracts investors to CLOs. Overall, investing capital per share was up $4.72, or 7% in the first quarter. Adjusting for the capital we used to acquire Falcon at the end of 2020, that's up 47% over the last 12 months. and more importantly, as Bobby mentioned, up about 26% from December 2019 pre-pandemic levels. The increase in the quarter was driven by the investment gains in both private equity and credit that I touched on earlier, as well as a meaningful contribution from the asset and wealth management segment, including $96 million of unrealized carry. At March 31st, 87% of our investing capital was invested and at work, up from 80% at year end. Although mark-to-market gains contributed to this shift, the larger factor was a net deployment of about $430 million. With over $900 million of cash and near cash, Onyx remains well-positioned to invest going forward. While having 87% of our capital in the ground and at work, which, by the way, is about a 10-plus year high, provides the foundation for strong NAV growth going forward. Lastly, a few comments on the asset and wealth management segment, which generated earnings of $148 million, or $1.61 per share in T1. The year-over-year increase was driven by PE, in particular, a significant contribution from carried interest. As I noted last quarter, we expect to see outsized impacts from carried interest relative to the gross returns in OP4 while we're in the catch-up zone. During this time, 32 cents of every incremental dollar of LP profit above the hurdle rate accrues to ONIX. With OP4 up 10% in the quarter, well above the 8% annual hurdle rate, ONIX benefited from a sizable carried interest accrual. Value created in OP5 and ONCAP3 also contributed to carry in the quarter. As a reminder, OP5 is just about 50% invested, so I won't be surprised to see some fluctuation in carried interest from quarter to quarter while that fund matures. Looking at the credit manager, as Bobby mentioned earlier, we are seeing positive momentum with the new strategies being launched and continue to focus our attention on growing AUM as a precursor to improving our margins, which currently reflect the upfront investment we've made in growth.
spk02: We'd now be happy to take any questions. Certainly, ladies and gentlemen, if you have a question at this time, please press star then one 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. Our first question comes from the line of Nick Pree from CIBC Capital Markets. Your question, please.
spk05: Yeah, thanks. So it looks like growth in the private markets was, once again, this quarter driven by a strong recovery in the group of businesses that had more of a direct impact from COVID implications. At a high level, can you just talk about how you'd approach valuing that particular category of investments just Given that, I would think that a multiplier approach in kind of a trough earnings period would be a bit less relevant. So do you rely more on kind of a DCF style or projection of run rate earnings? Just some color around how you arrive at the fair value estimate for that group of investments would be helpful.
spk01: Chris, are you going to?
spk03: No, I'll take that one. Okay, go ahead. Good morning, Nick. We try to triangulate the valuations through various forms. DCF is obviously one of them, and market comparables is another. And a lot of the businesses where we had sort of direct hits from the pandemic, the best comps for those businesses that are public have traded up meaningfully, in some cases above pre-pandemic levels. We haven't moved marks that aggressively. We'd like to make sure the summer is more normal and things open up. But we do look at various ways and put different weightings on it, and we've been consistent in that approach throughout the pandemic.
spk05: Okay. Fair enough. And then just given the fluctuating currency values subsequent to quarter end, I was wondering if there was any sort of very rough sensitivity you could provide on investing capital. I don't know, you know, is it fair to assume that the significant majority of your NAVs including corporate cash balances, would be U.S. dollar denominated, or would that be an oversimplification?
spk04: No, that's a fair simplification. In terms of our cash balance, Nick, we typically are running only about $50 million Canadian dollars kept in Canadian currency, just as a data point. So the cash is, think of that as U.S., It gets more complicated when you think about the private equity portfolio because obviously we have global businesses whose, you know, we might measure their income in U.S. dollars, but they do have exposure to currencies throughout the world. But for the most part, like think of it as a U.S. portfolio in private equity. There are some exceptions with some European exposure and some particularly in the on-cap portfolios in Canadian exposure. And then for the most part, our credit portfolio, you'd also think about as a pure U.S. dollar exposure.
spk05: Yeah, okay, makes sense. And then in your prepared remarks, I think you mentioned how you expect credit AUM to accelerate throughout the year. And I'm just wondering how your NAV mix might evolve, just given that I'm looking at your current allocation to credit if 13% is above your long-term target slightly. So, you know, do you still think 10% is a reasonable long-term allocation to credit?
spk04: Yeah, I think long-term it gets a little bit more difficult to predict. I think near-term, as Bobby has mentioned and I've mentioned on prior calls, we do expect our CLO business to continue to grow, but to grow with a lower contribution of ONIX equity. And so I think, you know, the gross amount of credit exposure may pick up a bit over the next year or two as we do seed some new funds. but it's going to be at a lower rate, a much lower rate than the AUM growth in that business. So, you know, is it going to be 12% a year from now? Maybe, but it's not going to be 20, 25%.
spk05: Got it. Understood. Okay, that's it for me. Thank you.
spk02: Thank you. Thank you. Once again, if you have a question at this time, please press star then one. Our next question comes from the line of Jeff Kwan from RBC Capital Markets. Your question, please.
spk06: Good morning. Just my first question, maybe following up on one of Nick's questions, is on that COVID-19 hit bucket, you talked about not moving up as aggressively as the public comps, but when the asset values were going down, is it also fair that you were not moving down the valuations of those investments as aggressively as what the market was implying?
spk03: No, actually, we did mark down. pretty aggressively when the multiples went down and the EBITDA wasn't there because we were in such an unknown situation that we decided to take the conservative approach. Again, we haven't been as aggressive on the upside, but I think you'll see those valuations continue to improve if we don't have another serious bout of COVID over the coming months.
spk06: Okay, so there could be some more to come if the public calms those valuation multiples to seeing themselves. Okay, and just maybe in light of just looking at the current market environment where, you know, asset values seem to be pretty favorable right now, I'm just wondering, has that had you thinking about monetizing some investments maybe a bit earlier than you would have originally thought, just essentially opportunistically take advantage of the window being open right now?
spk03: Yeah, again, we're always looking at what we own and what we should be monetizing based upon our investment thesis. I wouldn't say we're doing anything differently than we have historically done. You know, remember last year, we were pretty balanced. We deployed the same amount of capital that we returned pretty much. It was almost even. I can't really predict what's going to happen this year. The pipeline's decent from a from a new deal point of view. And again, we're constantly looking at what we should monetize, but I don't want to put a prediction out there.
spk06: Okay. And just my last question is on the share buyback. So you bought back 10% of your stock last year. Stock's still trading at a big discount to NAV, yet you guys have been putting up some really good NAV growth numbers. So just wanted to get a sense, given where your cash position is today, or essentially you cash usage, how you're thinking about that versus stock buybacks versus new acquisitions?
spk04: Yeah, Jeff, it's really the same as always, I'll say. We're always looking at, you know, that balancing act of what opportunities we have through our investment operations to put capital to work versus the opportunity to buy back our stock and trying to strike a balance there. The discount to NAV is an important consideration, but not the only consideration. And I would say to you that, you know, as Bobby said, I think we're very comfortable with the way we mark our portfolio. So the fact that it's, you know, I'll say, you know, run up doesn't cause us to be less aggressive. You made the right point. It's still trading at a very significant discount to its value, and that's the way we think about it. With $900-plus million of cash and near cash, I think we still have a lot of room for to be flexible and buy back some stock. And, you know, we'll monitor that throughout the year as other investments are made and, as you suggested, as any realizations come in. So, you know, we're still interested in buying back our stocks.
spk03: And I would add it's not just NABJEC we look at. We do take a different lens on the manager than the market seems to be giving us credit for. And as our AUM grows, we do expect that manager to be valuable and for people to recognize it. So we put that in our calculus as well.
spk06: Okay, perfect.
spk02: Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Jerry Schwartz for any further remarks.
spk01: Thank you. Look, thanks to everybody for participating in today's call. We truly appreciate the confidence and support of our shareholders. The pandemic was a pretty tough time, and having your support really meant a lot to us. And I want to acknowledge that in a very real way for you. I also want to thank Bobby and all of the Onyx employees, Chris and their teams, for their dedication and perseverance, really sticking with it. over this really demanding last year. I want to wish all of you the very best for a brighter summer. We think it's coming. And we look forward to speaking with you again in August and at our September Investor Day. Thanks, everybody. Bye.
spk02: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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