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Operator
Thank you for standing by and welcome to Onyx's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jill Hominick, Managing Director, Shareholder Relations and Communications.
Jill Hominick
Please go ahead. Thank you.
spk01
Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Bobby LeBlanc, ONIX's Chief Executive Officer, and Chris Govind, our Chief Financial Officer. Earlier this morning, we issued our first quarter 2023 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 Bobby.
Bobby LeBlanc
Good morning, everyone. It is an honor to lead my first earnings call as CEO of Onyx. I want to thank you, our shareholders, for supporting this transition, as well as Jerry and the board for their trust. Jerry has been an incredible mentor to me and I am thankful that Onyx will continue to benefit from his investing acumen. Throughout his long and storied career, Jerry helped establish the foundation of our industry and has been an active supporter of Canada's business community. All of us at Onyx are grateful to Jerry for what he has done to set us up for continued success. We were pleased with the shareholder response to the leadership proposal, but also acknowledged that, in other areas, shareholders sent a clear signal that we must do more, and we must do it at an accelerated pace. Under my leadership, the management team will be actively reviewing our strategic plans to generate shareholder value. You'll hear more about this in the coming months at an investor day in the fall. Recently, Onix has been navigating challenging market conditions. With challenge comes opportunity, particularly to realign and refocus against long-term priorities. I am confident that, as we look ahead, we will reemerge as a stronger and more streamlined organization. As CEO, this will be my top priority. Now on to a few business updates, starting with Gluskin Chef. As you know, earlier this year, we announced an agreement with RBC Wealth Management Canada, whereby RBC is offering our client wealth management and planning teams an opportunity to join their team while we gain access to their distribution channels for ONIX products. Partnering with one of Canada's largest wealth management distribution businesses represents a long-term opportunity for ONIX and will allow us to gain valuable insight as we work to expand our private client distribution strategy. The transition work with RBC is well underway. Given the focus on ensuring continued quality service for clients, the transition will take some time. At this point, we expect a formal wind down of Gluskin Chef's private client business to occur by the end of the year. Although there are a number of details still to be finalized, we are actively working with RBC and expect to have a more comprehensive update for you in Q2. Chris will also provide some details on the expected financial impact in his remarks. In ONIX Partners, we have made the tough but strategic decision to pause fundraising for ONIX Partner 6. This will allow us to focus on generating strong operating company value and realizations within OP5 and the remainder of the portfolio. until we resume fundraising for OP6. In addition, we still intend to deploy new capital, leveraging the remaining capital in OP5, co-investment opportunities with LPs, and ONIX's balance sheet. We believe this is the best path forward at this time, knowing we will continue to generate shareholder value through the more than $4 billion of our capital invested through ONIX partners. I will remain head of Onyx Partners until the completion of OP5's investment period later this year. Following that, OP's two senior managing directors, Nigel Wright and Tawfik Papatia, will assume leadership of the platform. Nigel and Tawfik are already taking on additional responsibility for operational and team management, and I will continue to work closely with them throughout this transition period. Our other investment strategies currently in fundraising are not impacted by the change in OP6. ONCAP completed its second close for ONCAP 5 in April, raising an additional $155 million of third-party capital, bringing its total commitments to $520 million, or just over a third of its target. Michael Lay and the team remain active in fundraising with significant LP interest and are confident in reaching their targets. In the meantime, they're making good progress with efforts to complete investing for ONCAP 4 and commence ONCAP 5. We expect to have more to report on this soon. Our credit team is actively marketing several strategies while developing new, innovative solutions to cater to today's investors' needs. To date this year, we have priced two US CLOs, adding $750 million of pre-generating AUM. After a strong first close last fall for Falcon 7, we expect to update you on its second close next quarter. We are also fundraising for our direct lending strategy, a product with substantial interest in this type of environment. And again, we'll have an update for you next quarter. One of the hallmarks of our credit business is our ability to provide a full spectrum of products while being nimble enough to adapt our offering in customized ways. This was evident in the partnership we established with Mercer last year, through which we are now receiving commitments to our Evergreen Fund, in addition to Mercer's initial seed capital. The strategy, called ONTAP, dynamically allocates capital across our credit strategies to optimize the risk versus reward objectives of our LPs. As we look back to our 2021 Investor Day and the strategy we laid out at the time, The fundamentals of our growth strategy remain in place, and we will continue deploying capital across all of our platforms, including Onyx Partners. We are resolute in our desire to grow our business and drive more value for our shareholders, but we do expect there to be an impact on our timing to generate positive fee-related earnings and potentially the relative contributions of each of our businesses. As I mentioned earlier, We plan to update our shareholders in more detail with a fall investor day. In the meantime, there is detailed work underway on tangible business plans to meet our objectives, including ensuring appropriate sizing of our cost base to match revenue expectations. The central message of our last earnings call was that we know we have more work to do. That has not changed. If anything, it has become more prominent in our planning and execution. I am firmly committed to making ONIX successful for all of our partners, including our shareholders. Thank you again for your support. With that, I'll now turn it over to Chris for highlights on the quarter. Chris?
Jerry
Thanks, Bobby, and good morning, everyone. Our first quarter investing capital per share of $96.24 is essentially flat quarter over quarter, but up 4% in the LTM period. In Canadian dollars, investing capital was just over $130 per share, up 12% year over year, reflecting the appreciation of the U.S. dollar. In the first quarter, gains in the ONCAP and direct investment portfolios were offset by a slight decrease in the larger ONIX Partners portfolio, resulting in a small gain overall from private equity. ONIX realized $89 million from its private equity portfolio in Q1, including distributions from Pure Canadian Gaming and ILAC, as well as proceeds from the partial sale of PowerSchool. Turning to credit investing, Onyx recognized a $28 million gain, or 4% return in Q1, driven by an increase in the fair value of CLO investments and consistent with returns in the underlying leveraged loan markets. Stepping back from the quarterly details for what we see as a long-term commitment to invest ONIX capital through our platforms, over the last five years, ONIX's investing capital per share has grown in an 11% category. Given those five years have seen us weather a global pandemic, Russia's invasion of Ukraine, a surge in inflation to its highest level in 40 years, and significant tightening in the credit markets, That 11% CAGR demonstrates the value of ONIX's diversified and actively managed portfolio. It also reflects a lot of hard work and hustle by our private equity and credit investment teams. Now turning to the asset management side of the business. ONIX's fee generating AUM at quarter end was $34.7 billion, with approximately 900 million raised across the firm year to date. Shortly after quarter end, ONCAP 5 completed its second close, bringing total commitments to approximately $520 million, including ONIX's commitment of $250 million. We continue to be bullish around our CLO platform, with our collateral portfolios ranked well within the industry and continuing demand from our investors. You can expect we'll continue to grow and scale CLO AUM with a through-cycle target to raise about $2 billion annually. And remember, we've dramatically improved the capital intensity of this business as it has grown. Part of a strategy that has seen ONIX's share of its CLO equity decline from almost 90% to about 60% in a little over three years. And over those three years, CLO AUM has grown from $8.9 billion to over $13 billion, a combination that is driving significant value in the platform. Turning to fee-related and distributable earnings, overall FRE was negative $16 million in Q1, including an $8 million loss from the asset management platform. This was largely unchanged from the prior year with an increase in performance fees at ONIX credit offset by lower management fees due to realizations in fully invested funds and the expenses associated with building out ONIX transportation partners. Looking at distributable earnings, we generated $68 million in Q1, driven by PE and CLO distributions. As you know, we announced an agreement with RBC Wealth Management Canada that will provide ONIX a long-term opportunity to expand its distribution of alternative asset products while the legacy Gluskin wealth management operations are wound down. In connection with the wind down, Q1 included a restructuring provision of $20 million, in addition to a non-cash charge of $171 million. In terms of run rate FRE, the wind-down of Gluskin should not be material. Given the off-ex investments we had been making, which we expected to accelerate over the next two years, the overall contribution from the Gluskin AUM was around break-even recently. At this point, it is unclear how much of the existing WASC and AUM our asset managers will retain. Looking at the three buckets on this slide, the decline in private credit and private equity AUM should be muted by the long-term nature of some of the fund structures and our expectations for traction on the RBC platform. We'll be working through each of the public credit and equity strategies case by case with our partners at RBC to determine their fit, and competitive positioning going forward. We expect to come out the other end of this transition with an ability to grow the private capital AUM we manage faster and more profitably than in the status quo. As Bobby discussed, the current fundraising market has had an impact on the timeline for us to deliver positive FRE across the business. This combined with the pause in fundraising for OP6 has required us to review our cost structure, particularly with the ONIX partners, and make some changes. As a result, we expect to incur a restructuring charge in Q2 in connection with these changes, although that amount should be less than the $20 million Q1 restructuring provision for Gluskin. These tough decisions are necessary to more appropriately align our cost structure with our near-term revenue base. With OP5's committed fee period slated to end late this year, ONIX Partners' 2023 FRE contribution will be relatively unaffected by the fundraising pause and should be around $15 million. However, following the step down in management fees for OP5, we expect ONIX Partners to have a temporary run rate FRE loss of $10 to $15 million to start 2024. However, we're going to work to substantially reduce that run rate through both the changes to our cost structure and new fee-earning strategies that leverage the ONIX Partners team and its key long-term relationships. And I think it's important to keep in mind that temporarily operating ONIX Partners at an FRE loss will still represent a very attractive cost of managing the $4.1 billion ONIX has invested through ONIX Partners today. And that's especially true once you factor in the carry opportunity on existing AUMs. Generating strong returns on ONIX capital invested by the ONIX Partners team will remain a key driver of shareholder value. As Bobby said, we look forward to providing you with a fulsome update on ONIX's business and go-forward model at our investor event later this year. That concludes the prepared remarks, so I'll be happy to take questions.
Operator
Certainly. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 11. One moment for our first question. And our first question comes from the line of Jeff Kwan from RBC Capital Markets. Your question, please.
Jeff Kwan
Hi, good morning. My first question was on with OP6. Just trying to understand what's happening there. So the third party capital that was committed Is that effectively just being kind of not quite returned to them, but they don't have that commitment anymore? And so when you do go out fundraising again, you're kind of starting brand new. And the other question I had on it is just with respect to the existing LPs in OP5, can you kind of talk about, like, is it a matter of, say, those LP investors saying they would invest in OP6, but just for whatever reason now is not the right time? Or are you getting some comments from some of the LPs that they don't have any current plans to participate in OP6?
Bobby LeBlanc
Hey, Jeff, it's Bobby. I'll take both of those. So we're working with those first closers in OP6 real time. Those are longstanding LP relationships. And, you know, we will certainly try to find an appropriate solution for investing that capital in partnership with Onyx Partners, but there's nothing formal around that yet. Those discussions are just beginning. On your second question, yes, no, we definitely have support of the OP4 and OP5 LPs. They appreciate the changes we made from a managerial and a go-to-market and an operational perspective over the last couple of years. They've seen it in the results. But right now what they want, they want to see more return of capital and the OP5 returns not be marks but be actual realizations. And that's because they want to see that. But it's also because, you know, the North American larger-cap PE market is just a very difficult market right now. Many, many of the institutional investors are over-allocated, and their inflows and outflows are out of whack versus norm. And for us, what they just want to see, they want to see the IRRs that we're telling them we're earning in OP5. be a bit more tangible before they commit. But it's been very few that have said, we just don't want to be in business with ONIX partners. It's more we need to see the results become tangible.
Jeff Kwan
That's helpful. Just my other question is the 2026 FRE target that you have out there, that guidance range, do you think that's still achievable? Or is it maybe the goalposts might need to move a little bit?
Jerry
Hey Jeff, it's Chris. I would say that the timing of that projection is certainly delayed. The fundraising market we've been in, which has actually affected the pace of all of our fundraising. We're doing well across our other strategies, but a little slower than we would have historically. But I think all of that combined means that that goal, that number, although achievable, it's not going to be a 2026 number anymore. We're going to come back at our investor event in the fall and provide a proper update with multi-year projections for all of you. Okay, thank you.
Operator
Thank you. One moment for our next question. And our next question comes from the line of Nick Preeve from CIBC Capital Markets. Your question, please.
Nick Preeve
Okay, thanks for the question. Just with respect to fundraising for OP6, are there any constraints that would compel you to return to market within a certain timeframe? Or do you have full flexibility to await better market conditions, whether that's in 6, 12, or 18 months?
Bobby LeBlanc
Yeah, I think it's probably like the beauty of an $8 billion balance sheet with no liability is we do have flexibility. There's nothing that is forcing us to come back to market on any given day. I think we've done a good job making sure the employees at Onyx Partners are being well compensated and are well tied up. We've done a good job there. It's just a matter of when we think the timing is right. There's no forced date for us. We have pretty good financial flexibility given our financial profile at Corp.
Nick Preeve
Understood. Can you just expand a bit on the plan to achieve product penetration within that RBC channel? Is the intent to scale up the client service team to support that effort or what are the early plans there?
Bobby LeBlanc
Look, RBC's got great distribution in and of itself. Now, we'll need to do a good job, the various managers of our products that go on that platform, making sure that 2,000-plus sales team understands our products and our relative performance and all of those kind of things. But that sales force should be serving as the distribution more so than us. If you begin to expand on the retail channel, as we begin to expand beyond RBC, whether that be you know, in the U.S. or otherwise, you will need people to sell into that channel, and we're mapping out the building of that RCAP scene with that in mind.
Nick Preeve
Okay, very good. That's all I had. Thanks.
Bobby LeBlanc
Thank you.
Operator
Thank you. One moment for our next question. And our next question comes from the line of Graham Riding from TD Securities. Your question, please. Hi, good morning.
Graham Riding
Just wondering what the discussions are internally on the border management level on just the discount to NAV and what your options are to try to narrow that discount. Can you provide maybe more disclosure to give the market some comfort around the value of your private assets? Are there things that you could maybe sell to a third party to establish value? can you monetize some of your own assets and turn around and buy back shares? Like maybe what are some of the things that you're looking at?
Bobby LeBlanc
Yeah. So thanks, Bobby. Like the discount to NAV is, is certainly frustrating. There are things you can do to free up capital that are unnatural and the things that we can do to free up capital that are very natural. So the fact that our LPs want return of capital and that's top of mind for them, like, Part of our day job is to make sure we're monitoring our portfolio for realizations that are appropriate for any given fund. There are secondary buyers, as I think you know, Graham, in the market for PEN credit, where we could sell portions of Onyx's GP stake and turn around and use that money to buy back shares to prove how big a gap there is between how our PE portfolio is being, the implied value of our PE portfolio and our share price versus where the third-party market is. We don't like the pricing in that market right now. You know, that pricing is in the sort of 80 to, you know, 85% of our cost. So, you know, we don't want to lose the compounding effect. But that market is there, and I'm surprised that shareholders haven't spent more time understanding that. when they look at an implied value of our PE portfolio that's honestly less than 30 cents in the dollar if you just give credit, dollar for dollar credit for cash, and for our public holdings, a small discount for friction costs to get out. So it's a bit of a head scratcher, but we're well aware of it, and we're looking for ways to be able to begin to take advantage of it again. We've been very cautious on liquidity, just given the market volatilities. But, you know, we are looking at things that we, you know, things that we own and what would be appropriate to sell. And part of the use of that proceeds will not only be to support credit and Onyx Transportation Partners and Onyx Partners, but some of that's going to go towards share buybacks until the share price makes any sense to us.
Graham Riding
Okay, that's helpful. And then maybe just an update on your cash level, $1.1 billion. Does that suggest there's not a lot of excess cash currently to be buying back shares given, I guess, your commitments and I guess your comfort level on just where you like to keep the balance sheet?
Bobby LeBlanc
That feels like the right amount of liquidity for us right now, but we do see where the share price is and we're, again, every day looking at are there things that we should be monetizing to use some of those proceeds to be more active in the share buyback market. We know what value there is in buying back those shares, and it's top of mind for us to be able to do that. But we do feel the billion-ish is about the right level, given our commitment. But, again, you shouldn't be surprised if you see us active again in the near term.
Graham Riding
That's for me. Thank you.
Operator
Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1. One moment for our next question. And our next question comes from a line of Scott Chan from Canaccord Genuity. Your question, please.
Scott Chan
Yeah, thanks a lot. Bobby, going back to OP5, you kind of talked about really focusing on monetizing. And I guess it's been five years in that fund. Is that an impediment? for OP's sake, and I think you addressed it a little bit, and kind of looking at that portfolio, like, are there early signs of potentially exiting or monetizing some of it right now, or is it still the market is not there and you're just monitoring it more so right now?
Bobby LeBlanc
So I can't get into specific names, but there are a couple of investments that could have the potential to monetize, you know, what I'll say in the near term. When I say near term, I'd say over the next, you know, over the next year. I think there's also opportunity in the Onyx Partners 4 portfolio for the same. And, look, I think a lot of our LPs are in 4 and 5, so DPI coming back from either will be well-received. But it is – It is a bit circular. We do need to be able to return capital to show that those marks that we're telling them, the projections for our IRRs that we're telling them are right. Historically, I think we've told you on prior calls, on average, six months before we sell an asset, we're 30% undermarked vis-a-vis where we ultimately trade. And the three companies that we monitor for, that we had partial monetizations on last year, we're all above our mark. So I think we just need to show that path and allow the macro environment for private equity, North American large cap private equity or mid cap, whatever you want to call it in particular, to have a better, you should have a better outlook in terms of the over allocation for institutional investors.
Scott Chan
And I think in the past lot that you talked about each subsequent onyx partners fund has been a strong similar LP base from the past fund. And is that the case for OP5? And is that, I kind of went back to my first question, is that an impediment as this cycle might be a bit longer for that fund? I think in the past we've said it's over 50%, but maybe you can kind of square that out.
Bobby LeBlanc
Yes, so we've always had pretty good re-ups fund to fund, but OP5 certainly has some newer LPs from OP4. I missed the second part of your question. Sorry.
Scott Chan
Oh, just the fact that, like, a lot of the OP5 LPs have capital tied up. And if the cycle is going to be longer, I'm thinking it might delay the fundraising a bit longer for a resumption of fundraising for OP6. I wonder if that's, like, a primary factor or is the market?
Bobby LeBlanc
Oh, I actually think, you know, what would be helpful for speeding up OP5 monetization would be a better functioning debt market, right? And I'm not sure how long the debt function, that the available debt capital will be relatively constrained to what we've seen in the last five years. We all know cost to borrow has gone up and the quantum of debt will be less, but just the access to that capital is muted right now. Any kind of signs of normalcy there, I think you'll begin to see PE activity pick up, including monetization opportunities for ONIX partners.
Scott Chan
And then lastly, on the cost base, you talked about the restructuring charge next quarter, ONIX partners. Are you looking at other facets within your organization on rationalizing costs as well?
Bobby LeBlanc
Yes, we are. We're looking at everything. look at our business from a revenue perspective and where we are and make sure we have a cost structure that's aligned with that. And that exercise is going on real time. Too early for us to tell you what that means, but we're laser focused on it.
Scott Chan
Okay. Thank you very much.
Operator
Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Bobby LeBlanc for any further remarks.
Bobby LeBlanc
Thanks for joining us today, and again, thank you for your support to approve our amendments. I'm honored to be ONIX's second CEO in our 41-year history. Jerry and I were talking about that yesterday. It's kind of hard to believe those words, but it's an honor, and again, thank you very much for the support. Have a great day.
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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