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Operator
Welcome to ONIX third quarter 2022 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 1-1 on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to Jill Hominick, Managing Director, Shareholder Relations and Communications at ONIX. Please go ahead.
Jill Hominick
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, ONIX's president and head of ONIX Partners, and Chris Gevin, our chief financial officer. Earlier this morning, we issued our third quarter 2022 press release, MD&A, and consolidated financial statements, which are available in 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.
Jerry Schwartz
Thanks, Jill. Good morning everyone, and thanks for joining us today. You know, I'm thinking back to when ONIX was created nearly 40 years ago. It was built to perform consistently in a wide range of market conditions. Our focus today remains, as it did then, on the virtue of disciplined investing. This includes a bias towards value, prudent and conservative underwriting, and ample liquidity. This approach has allowed us to convert market dislocations into moments of opportunity. We saw this dynamic at play during the great financial crisis of 2008 and again during the pandemic. Today, as markets continue to fluctuate in the face of macroeconomic and political uncertainty, I am confident that our strong culture, client relationships, and financial position will allow us to emerge even stronger. To that end, we also have to keep our eye on the future to ensure continuity and a strong path for growth and success. On that note, it is my pleasure, and I really mean a pleasure, to announce our proposal to appoint Bobby LeBlanc as Chief Executive Officer following our 36th Annual General Meeting in May of next year. I've had the pleasure of working alongside Bobby for 23 years. A consummate professional with a wealth of investment and management experience, he's the ideal person to lead ONIX and drive value for our partners, investors, and shareholders. Over the last two years, Bobby, as president, has played an instrumental role in our strategic plan and has led many of our firm-wide initiatives. In addition to his work with ONIX partners, he's also been actively engaged with our business platforms and is a strong advocate for our OneONIX approach. As founder and chairman, I will certainly continue to remain involved with ONIX and to work with Bobby to be part of our growth. This proposal is conditional. upon an amendment to the multiple voting shares to maintain their current voting entitlement following the transition of rules. In addition, a five-year sunset provision will be added to the MVS. Shareholders will, of course, be asked to approve the proposal at our next AGM. We believe that this is the right approach, creating an appropriate balance between continuity and planning for the future. We wanted to provide shareholders with a clear and orderly indication of our succession plans. I want to thank the entire ONIX team for their remarkable support in this time of great change and opportunity. With that, let's turn it over to Bobby for more on the quarter. Bobby?
Jill
Good morning, everyone, and thank you, Jerry. I've had the privilege of being at Onyx for 23 years and seeing the organization grow and evolve. Today, we benefit from a nearly 40-year track record of strong investing combined with the momentum, culture, and drive to succeed. We continue to execute on our strategic plan and remain focused on delivering growth and shareholder value. I am honored to have the support of Jerry and the board. and look forward to engaging with many of you in the months ahead. Jerry's been a terrific teacher, mentor, and friend to me, and I am grateful for our continued partnership. While it was important to provide clarity on our leadership transition, our main priority remains the day-to-day management of our businesses. We're navigating industry and market challenges effectively, maintaining a clear focus on performance and long-term growth opportunities. Our private equity portfolio performed well in Q3, outpacing the broader equity indices. We're actively working with our companies to mitigate near-term macroeconomic impacts and execute on strategic initiatives. I previously mentioned value creation plans, the comprehensive roadmaps we developed with our portfolio companies early in our ownership. With our partners, these plans allow us to build consensus around priorities and the pathways to achieve them. We recently completed a new plan at Tez Global and are already seeing the benefits, including strong revenue and EBITDA performance, the completion of two add-on acquisitions, and other value-added initiatives. Recently, we held the first close for ONIX Partner 6, with the next close planned for early in the new year. We reached aggregate commitments of approximately $2 billion, including Anika's commitment of $1.5 billion, and welcome some of our long-term partners as investors. As I've said before, and has been largely evident across the industry, this is a tough fundraising environment, and we expect this fundraise to be longer than what we have experienced with previous funds. We continue to have deployment flexibility in OP5, with room for one or two more investments. OnCap is also now actively fundraising, with an expected first close for its new fund, OnCap 5, before the end of the year. OnCap 4 still has capacity for one more investment, and despite the general slowdown in activity, the team continues to find interesting opportunities within its sectors of emphasis. Overall, the industry has experienced a significantly slower deployment environment with a tighter financing market and continued valuation expectation gaps between buyers and sellers. Conditions should improve as markets normalize. In the meantime, we maintain our usual robust discipline to diligence new opportunities. Turning to credit, our strategies are holding up well despite the challenging conditions. Investors continue to be attracted to credit given the rising interest rate environment and the need to achieve return objectives without stretching for risk. These conditions create a healthy tailwind for our credit business and are supportive of our longer-term growth objectives. We had our first close for Onyx Falcon 7 in early November. The fund, which has a target of $1.5 billion, closed on approximately $430 million of committed third-party capital. We're also actively fundraising with institutional investors for Falcon's direct lending strategy and expect to have more to report in our next quarter. Looking at our other platforms, Onyx Transportation Partners has also officially begun fundraising with a first close expected in the first half of next year. Our private wealth platform, Gluskin Chef, completed its fourth consecutive quarter of net positive inflows. a nice accomplishment in today's market. Dave Kelly and the team continue to execute our strategic initiatives to allow us to scale the business more rapidly, both from a client and advisor perspective. And we continue to enhance our wealth planning offering, most recently with the addition of a team of seasoned insurance advisors with expertise in both tax and estate planning. Progress is being made across all of our businesses within our one on X approach. driving incremental opportunity and growth. Our diversification in recent years has been key to reducing our reliance on any one part of the market, broadening our revenue streams and allowing us to begin to deliver on our long-term objectives. Before closing, I wanted to say a few words about our investing capital, which ended the quarter just above $90 a share U.S. or $123 Canadian. At these levels, ONIX shares are trading at a substantial discount to their intrinsic value. The discount is even more stark when considering our cash position and public holdings. While sentiment towards the broader market, and alternative asset managers in particular, is challenging right now, we have great confidence in the intrinsic value of our business. As a reminder, within private equity, We have a robust valuation process that we undertake every quarter to mark our investments. They are reviewed and audited each quarter and are the same marks we provide to our limited partners. Moreover, history has shown that our valuations tend to be conservative compared to ultimate realizations. We believe strongly in the value of an onyx shareholder's own and are backing that up with the investment in our own shares. Although it's an opportunity we'd prefer not to have, we believe we know a good value when we see one. From the start of the year to October, we bought back 4.7 million shares, but 3.5 million of that in the last four months alone. We will continue to be opportunistic and believe that existing shareholders will be rewarded. We know it's our responsibility to continue to deliver shareholder value, and we're committed to doing it. We have built a strong platform and by remaining true to our investing principles and sticking to our plan, we have confidence we will succeed. I'll now hand the call over to Chris.
Jerry
Thanks Bobby and good morning everyone. Investing capital per share was down less than 1% in Q3 and up 4% over the last year. As Bobby alluded to in his remarks, our PE results continue to provide outperformance compared to the public market with the S&P 500 and the MSCI world mid-cap indices down about 5% to 6% in the quarter. Moreover, share repurchases at a substantial discount to NAV contributed about $1.10 of value per share in the quarter. The overall value of our PE portfolio was down 2% in Q3, reflecting continued market volatility, higher interest rates, and other macro factors. However, 82 million or almost 70% of the Q3 mark-to-market decline in PE reflects FX losses from our non-US investments. Notwithstanding the overall decline, there were pockets of outperformance, with PowerSchool up about 40% in the quarter, as well as markups in other holdings with improved performance or outlook. During the quarter, ONIX realized $295 million from its PE investments, primarily from the previously announced realizations of PAR II, AIT, and Ryan LLC. While market conditions for additional monetizations are less favorable today, we'll remain focused on execution across the portfolio while we wait for this cycle to run its course. Turning to credit, we generated a $10 million gain or 2% return from credit investments in Q3, consistent with the Credit Suisse Leverage Loan Index, which was up about 1%. Performance of our CLO assets remained strong, as we received $19 million in regular quarterly distributions. Overall, our investing capital per share ended the quarter at $90.26, or Canadian $123.71. Now turning to the asset management side of the business. Our fee-generating AUM of $32.9 billion was down less than 2% in the quarter and flat from year-end. Market headwinds were largely offset by new capital raised this year, notably $1.4 billion of CLO AUM, including CLO25, which closed in the quarter. Excluding those mark-to-market and FX headwinds, fee-generating AUM is up just over 2% so far this year. As Bobby mentioned, the fundraising markets are challenging, certainly more so than when we set targets for 2022. We now project raising about $3 billion in fee-generating AUM for 2022 once we close out Q4, about a 10% gross increase for the year. While short of our target, we believe much of the shortfall is timing, and we can make up a good portion of that in 2023. We expect to have an update on 2023 plans for you next quarter. Despite the choppy markets, and to a degree because of them, we remain positive on our long-term prospects. We expect new opportunities at attractive entry valuations to drive strong investment performance for Onyx and our clients. Moreover, our ability to invest across the entire capital structure continues to resonate with clients. and bodes well for our ability to grow the asset manager going forward. As we continue to build ONIX's capacity to generate FRE, let's turn to where we're at today. In the quarter, we had an FRE loss of $15 million, including a $6 million loss from the asset management platform. The year-over-year decline was driven by higher private equity expenses that include the build-out of ONIX transportation partners. ONIX again generated meaningful distributable earnings, $193 million in Q3, driven by PE realizations and CLO distributions. And it's important to remember the meaningful opportunity for value creation from ONIX's participation in carried interest. Although, as you'd expect, we had a reversal of unrealized carried interest in the quarter, we ended Q3 with $168 million of unrealized carry. And in the long term, we expect Cary to generate significantly more value, with shareholders having a stake in nearly $25 billion of Cary paying AUM at quarter end. Finally, as Bobby mentioned, one attractive opportunity the markets have already presented is the ability to invest in the business we know best. In Q3, we would purchase an additional 2.4 million shares and remain through October, bringing our total repurchases this year to 4.7 million shares. These repurchases captured more than $230 million Canadian dollars of hard and AV for our continuing shareholders. As Jerry said at the outset, Onyx's approach has always included investing discipline and an appreciation for the value of liquidity. These cornerstones will serve us well in the current market. Our diversified private equity portfolio remains well positioned to generate value going forward. Approximately 85% of the debt at our operating companies matures in 2025 or later. And we continue to work with our businesses to execute on their value creation plans. And ONIX itself benefits from a debt-free balance sheet, $1.3 billion of cash and near cash, and consistent distributable earnings available for reinvestment. As a result, we're able to execute on strategic initiatives while being ready to take advantage of the opportunities we expect the current markets to provide. That concludes the prepared remarks, so we're happy to take any questions.
Operator
Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Nick Preet from CIBC. Your question, please.
OP
Okay, thanks. I just wanted to start with a question on Onyx's share price and the discount to NAV. Are there any actions you feel could be taken to help narrow that discount? And just to float an idea, I'm wondering if you would consider selling an LP interest in the secondaries market at a narrower discount to NAV than the stock trades in order to demonstrate value and then use the proceeds to creatively buy back stock. Or is there anything else that you might have in mind to help sort of illustrate value?
Jill
Yeah, hi, it's Bobby. Yeah, we, you know, we think about those kind of things all the time. That secondary market that you refer to was very robust in the first half of the year. It since has fallen off a bit and, you know, where that market would bid our interest in one of our funds is not something we'd be interested in now, but that trade exists. And when you think about, you know, Secondary buying above 100 cents and a dollar in the first half of the year and the implied value of our PE portfolio when you adjust for cash and our public holdings, that arbitrage is real. Whether it's 100 today or 105 today versus a market that's less, it's so much higher than the public shareholders are ascribing to the value of the portfolio. So we're thinking about that stuff all the time. We just want to, you know, if we do something like that, we want to do it from a position of strength, not a market where people will value our assets less than we believe they're worth. But there are many things that you can do like that. And over time, we'll look at them. And when they make sense, I think that would be a good proof point to that, that the value is really there, even though the market says it's not.
Jerry
Yeah, just as a follow-on, Chris Govan, you know, the other thing with that kind of trade is, We could also prove out an easy way, I'll call it, to build out our fee-generating AUM. Because the other nice thing about those types of transactions is it's an opportunity to take something off our balance sheet and put it in the hands of a fee-paying LP. So certainly something that's on our radar.
Jill
And that usually comes with a staple to the new fund. There's a lot of moving parts in there, but it's something that we we've been considering for the last little while. I think it would be a very tangible proof point.
OP
Yeah, okay. And then just moving on to the fundraising side, a lot of the alternative asset managers in the US have emphasized how under-penetrated private alternative asset classes like private equity are among high net worth investor portfolios and how that's a source of upside longer term in terms of third party demand. You do have access to captive distribution in that channel with Gluskin, but as you advance fundraising efforts for OP6, are you making a greater effort to target commitments from high net worth investors? How do you think about that opportunity in general?
Jill
No, I think that is a very big opportunity for us and for OP, for OnCap, for OnX, just generally speaking for all of our products, credit as well. I think the high net worth channel North America is very under-penetrated, especially in Canada, where our brand is really good. We do have Gluskin, as you mentioned, and I think, as you know, we've probably talked about it. We've distributed a billion dollars of our credit product through that channel, and we'll be distributing our both on-cap and OP products through that channel. But we're also working with other Canadian and U.S. banks that have really good high-net-worth channels to try to penetrate those as well. I think you'll see more activity from us trying to tap that channel and not to so much diversify away from institutions, but to have another avenue of growth for fee generating AUM. It's an opportunity we're quite excited about.
OP
It's no secret the fundraising environment is challenging this year, in part because of the denominator effect and also the outperformance of PEs and asset class. You know, another factor, of course, influencing fundraising success is historical investment performance. And I know returns on OP5 are strong, certainly strong in absolute terms, but private equity has also been very strong as an asset class the last few years. How would you say OP5's returns measure up against other funds of a similar vintage who might be in the market at the same time as you?
Jill
I think OP5 is off to a very good start. These quartiles early on in a fund's life can move around. I think it's really important to note that historically we've never utilized financial leverage subscription lines to be specific to manage IRR. If you were to make that one adjustment, which we'll do for OP6 going forward, Fund 5 is easily a first quartile fund right now. So we feel really good about that. I think as 2023 plays out and that portfolio for OP5 becomes more seasoned, I think it's going to give LPs confidence that all the changes we've made for the last three or four years at the OP side are working. And it is a challenging fundraising environment. We had this first close that we referred to on the call, We will be in the market for a long time with OP6, but I think as every quarter OP5 has, that reinforces its relative performance. I think it's going to help.
OP
Okay, very good. I'll pass the line. Thanks for taking my questions. Thank you.
Operator
Thank you. One moment for our next question. And our next question comes from the line of Jeff Quant from RVC Capital Markets. Your question, please.
Jeff Quant
Hi, good morning. Jerry, I just want to start off a question for you just with the move to being the chairman. You talked about still being involved, but just how would you describe how that involvement in the company looks like when that happens versus what you're doing now in terms of both time commitment nature of the work that you would be doing with the company.
Jerry
Hey, Jeff, it's Chris Govan. You know, I think today, you know, we decided to communicate this change early to provide clarity on the planned leadership transition. And certainly, you know, we believe that this next step is evidence of a well-planned and orderly succession, and it's going to be viewed as a positive for our shareholders. The other reason we announced today was to provide us lots of time to proactively engage with our shareholders over the next six months. And we don't want to get too ahead of those discussions on today's call. So really would sort of direct you in the meantime, as we roll up that communication plan to direct any detailed questions you might have to our shareholders relations team. But we're going to be very proactive and out there with our shareholders and making sure they have a full understanding of what's proposed. prior to the circular being published in the spring and in advance of the May AGM.
Jeff Quant
Okay. And then just on the fundraising for OP6, I know it's hard to generalize, but is there anything you can talk about in terms of just the nature of the commentary you're getting back from the LPs that you're talking to? And then in terms of final close, do you have because you talked about it being longer than usual. Like, what does that timeline look like in terms of how you're thinking about what the fundraising process would be? And does that impact, with OP5 being almost fully vested, kind of the appetite in terms of looking at new investment opportunities?
Jill
Yes, there's a lot in there. So let me try to address all of it. So 2022, I think we've been very vocal about how crowded the market was. And it was. And We had a couple of our long-term, several of our long-term LPs in the first close. We'll have a second close early in 23, as I mentioned, because people were just out of capacity in 2022. That is a common theme that we're hearing. As well as, you know, we like the improvement we've seen in OP4 over the last couple of years. We like the way OP5 looks. And I think you'll see, hopefully, more confidence build. And again, that's a positive thing. All the change we made have been viewed as a positive with actual results. How long we're going to be in the market? Technically, you have 18 months from the first close. So that could put you into Q1 of 2024 or through Q1 of 2024. Not sure whether we'll need that or not, but that's sort of the technical timeline we have. And it's just tough to know. It's tough to know what the fundraising environment will be in 2023, but the more quarters that we have with OP4 stabilizing at a decent gross IRR and sort of 13%, 14% and OP5 looking as good as this, hopefully that gives people the confidence that we're on the right track here.
Jeff Quant
And if I can maybe just sneak in one last question. Just from a strategic perspective, how much do you think about You know, being in traditional private equity now, you've got credit, but moving into other asset classes because when, you know, you have some of your peers offer, you know, other types of products and different asset classes there, just whether or not, you know, that's a competitive advantage for them or not when thinking about the fundraising aspect and dealing with the LPs that you do.
Jill
Yeah, so look, I think there's usually value in diversification. So we historically have been a private equity firm only. In today's markets, you know, a lot of our credit products are in really high demand, so we ought to be able to see some growth there. As we look to the future strategically, you know, we're in the early stages of asking ourselves, where else should we be competing in not only PE and credit and transportation as a form of PE, but are there other asset classes that we should think about that would create more enterprise value for onyx again early innings we could do that organically like we've done with onyx transportation partners obviously given our our pristine balance sheet we could do that inorganically as well but i think it's too early to tell but i think the value of diversification in a market like this is is good and i think um i like the fact that we're in credit and these other things um because it's just given us It just kind of mutes any weakness that you might have in any product at any point in time.
Jeff Quant
Okay, thank you. You're welcome.
Operator
Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our next question. And our next question comes from the line of Graham Reineck from TD Securities. Your question, please.
Graham Reineck
Hi. I just wanted to start with, I guess, the change in the multivoting structure. I think originally the terms were that a change in the CEO would trigger the collapse of the multivoting structure. So why are you proposing now to extend the voting and the board rights for another five years as opposed to staying with the original terms?
Jerry
Yeah. Hey, Graham. It's Chris Govan again. I think you've got to look at the transition as a whole. And we believe that what we've done over the last two years and what we're proposing to do going forward reflects a really well thought through transition for the company and puts it on the right path for growth going forward. And believe that when you look at it together, that what's being proposed is a positive change for the company. And we believe shareholders are going to agree. As I said, we're going to have lots of proactive discussions with our shareholders in the run-up to an actual vote in May. So I'm not going to go sort of any further on specifics around the proposal on this call.
Graham Reineck
Okay, understood. On the PE fundraising side, so your commitment for OP6, $1.5 billion, I think that's lower than your $2 billion commitment for OP5. Should we be interpreting anything there in terms of the targeted size for this next fund? Are you thinking it's going to be lower than OP5?
Jill
No. So we've told our OP6 LPs that our commitment will be between $1.5 billion and $2 billion. When we set the $1.5 billion as the initial close, we did that as a function of our liquidity and other things that we have going on internally at Onyx because we just want to make sure that we have plenty to fund commitments as they come, but you shouldn't read anything into that. We've told the OP6 LPs it will be between $1.5 billion and $2 billion, and if our liquidity continues to be as good as it is, I wouldn't be surprised if it is $2 billion in this case.
Graham Reineck
Okay, so you haven't actually put out a targeted size for OP6 overall?
Jerry Schwartz
I missed that question.
Graham Reineck
You haven't established a targeted size for OP6 overall. It remains fluid.
Jill
I think where we sit today, it needs to remain fluid just because I don't, I really don't know what 2020, like we're going to have a fund, like don't get me wrong. Like there's the Onyx partners is going to have a fund. We have a $7 billion balance sheet. Like this is, this is a moment in time of a bumpy road in the fundraising environment. how big the fund's going to be relative to OP5, I think it would be, it wouldn't be fair to me to guess. I think what we ought to do is each quarter tell you how we're doing. And as we get further into it, have an idea of the band of which, you know, high versus low and where we expect to come out. And we'll communicate that with you every quarter.
Graham Reineck
Okay. Understood. Chris, maybe Chris, can you just give us an update or remind us sort of what to expect here in terms of the implications for, you know, run rate private equity fees as you're transitioning from, you know, first closes on OP6 and ONCAP and then from your investment funds.
Jerry
Sure. And I'll just focus on OP because those numbers are a little bit more memorable for me, but happy to offline take you through the map because I think, you know, you can sort of based on our public disclosures, kind of do the math easily, but I'm happy to take you through OnCap offline. If you looked at OP, with about $500 million of third-party capital, if OP5, if its investment period was to end today and OP6 was to go active, our run rate fees for private equity would temporarily be reduced annually by about call it $35 million. Now, as Bobby mentioned, we've got, I think, call it around 600, $650 million of capital remaining to invest in OP5. So we're not expecting that to happen anytime real soon, but that would be the impact if it was to kind of happen today with 500 million of third-party capital in OP6. Now, as a reminder, you know, as we complete subsequent closes in OP6, as Bobby said, potentially through early 2024, all investors in the fund do pay management fees back to the effective date of OP6. So there will be this timing issue between what I kind of think of as economic management fee revenue and reported gap management pre-revenue probably, you know, kind of over the next 15 months or so. But that's, I don't know if that's answering your question, but I could, again, I don't have those numbers for on-cap handy, but I could take you through that offline.
Graham Reineck
No, no, that's helpful. And then, so what is the trigger then for your fees to move from, for OP5 to move from sort of a committed run rate to an invested? Is it just once you get that last investment in?
Jerry
That's right. It's once we make the determination that essentially, once we make the determination that we're now in the market hunting for an investment for OP6, as opposed to still looking for investments to close out OP5. And so that's at least one investment away, but potentially two. Understood.
Graham Reineck
Okay. And then my last question, if I could, just maybe an update on the CLO side. Can you give us some commentary on on how you see that market performing. You know, I understand there's been some pullback broadly from sort of the investor base, given the volatile markets, but also, you know, the supply of loans, I think, is lower just given the lower PE activity. So maybe some commentary there, please.
Jill
Yeah, our CLO portfolios held up quite well, but the new issuance is quite slow for the reason you just outlined. There's just not a lot of M&A activity right now, particularly on the PE side, you know, as the rates have risen quickly, sort of the bias spread on new PE deals has caused volume to slow down, which obviously is directly correlated on the CLO side. But again, the rising rates, the assets, liabilities, like that all seems to be working reasonably well right now. And, you know, we'll continue to keep an eye on it. But the distributions are coming in as normal, as Chris mentioned, and You know, no red flags there as of now.
Graham Reineck
Great. That's it for me. Thank you.
Operator
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.
Jerry Schwartz
Thank you, Operator. And thanks again to everyone for joining us today. We really appreciate your continued support, and we look forward to speaking with you again next quarter. Until then, We wish everyone a safe and joyous holiday season. Talk to you later.
Operator
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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