ONEX Corporation

Welcome to ONIX's second quarter 2024 conference call and webcast. During the presentation, all participants will be in 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 Homanoog, Managing Director of Shareholder Relations and Communications at ONIX. Please go ahead. Thank you.

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 Govan, our Chief Financial Officer. Earlier this morning, we issued our second quarter 2024 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. A 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.

Good morning, everyone. I want to first welcome Sarah Wechter to ONIX's Board of Directors. This morning, we announced Sarah as a new independent director and I'm very happy that she has joined us. Sarah is the Chief Human Resources Officer at Citigroup, where she is responsible for all talent management and employee relations programs. She's a recognized leader in effective and equitable compensation structures that are aligned with strategic objectives. Her experience supporting leaders and boards through transition periods will be a particular benefit to Onyx and me in the coming years. Now on to Q2 results. Overall, ONIX had a good second quarter with continued fundraising activity in priority areas and strong progress on realizations across ONCAP and ONIX partners. Our investing capital per share had a 3% return in Q2 driven by gains across our private equity platforms, including a strong contribution from ONCAP. Both OP and ONCAP saw incremental progress with fundraising. Including ONIX commitments, our ONIX Partners Opportunities Fund has now raised $820 million, while ONCAP 5 had reached commitments nearing $1 billion. Our PE teams are doing good work securing return on capital for our limited partners, which is a positive for our fundraising efforts. Last week, ONCAP completed the sale of Englobe, And recently, ONCAP 4 sold its investment in Wise Meter Solutions to a single asset continuation fund to be managed by ONCAP. This is ONCAP's first continuation vehicle and follows Onyx Partners' successful continuation fund for Ryan LLC last fall. These funds will continue to play an important role in our realization strategies, providing valuable ongoing fee and carry generation opportunities for Onyx. Through July, ONCAP has returned approximately $390 million to investors, or 15% of the value of ONCAP investments at the start of the year. The Onyx Partners team was also active in Q2. Onyx Partners IV entered into an agreement to sell approximately half of its shares in PowerSchool as part of a take-private transaction, which is expected to close in the third quarter. I am also pleased to report that the sale of ASM has met all required conditions and is expected to close by the end of this month. Combined, the two transactions represent an expected return of capital of approximately $1.6 billion to ONIX partners and approximately $530 million to ONIX. Turning to credit, our CLO platform has had a stellar year so far, raising or extending a total of $7 billion of fee-generating AUM through new issuances and resets of prior CLOs. In July, the team priced its 34th US CLO, which was the third largest broadly syndicated CLO this year, and its 10th European CLO, matching its largest CLO since inception. With deals priced or closed through July, we have well exceeded the growth we had targeted for all of 2024. The team is continuing to take advantage of opportunities to further grow the platform backed by strong investor demand for allocations across the entire capital structure. Moreover, this growth has been very capital efficient from an onyx balance sheet perspective. You've heard me say this before, but as we look to the future, we will continue to prioritize areas where we have a right to compete and win. Our teams in private equity have proven that they can persevere through industry cycles and continue to provide strong performance for investors. Ronnie and our credit team are showing what can be achieved when you build longstanding investor relationships based on proactive management, innovative client solutions, and high-performing portfolios that protect investor capital. Recently, we made the decision to separate Falcon from Onyx to operate as an independent entity from now on. While we believe in the team's ability to deliver investing success, the synergies across the remainder of our platforms did not materialize to the extent that the ONIX resources needed to support the business outweighed the benefits. We will continue to maintain a minority interest in Falcon, along with future carried interest participation. Chris will provide more details in his remarks. One of my commitments to Shareholders and Investors Day was to ensure we are disciplined in the use of our resources, particularly our balance sheet. Our balance sheet is a key differentiator, and we must use it wisely to drive increased shareholder value. Strategic alignment of our businesses and our balance sheet to our long-term objectives is my top priority, and you can expect to hear more from me on our plans in the coming quarters. Thank you for your continued support as we work towards building a stronger ONIX for all stakeholders. With that, I'll now turn it over to Chris.

Thanks, Bobby, and good morning, everyone. ONIX ended Q2 with investing capital per share of $110.35, reflecting a return of 3% in the quarter. Investing capital per share has returned 11% over the last 12 months and 13% annually over the last five years. To put that five-year return in context, The $110 of investing capital per share today compares to just $67 per share five years ago. Meaningful growth in the underlying value of our shares. Onyx repurchased approximately 880,000 shares in Q2, the second most active quarter since 2022. Over the last 12 months, repurchases totaled 3.9 million shares, or almost 5% of outstanding shares, allowing us to capture $175 million of hard NAV for continuing shareholders. It was a solid quarter from an investment and realization perspective. As Bobby mentioned, Onyx Partners closed out OP5 with the acquisition of Accredited in late June. On the realization front, We progressed and completed several transactions that crystallized attractive returns for our investors and will provide meaningful DPI. ONCAP recently completed the sale of Englobe and the sale of Wise Meter Solutions to a continuation fund that will continue to provide management fees and carried interest going forward. At Onyx Partners, we announced an agreement to sell approximately half of the PowerSchool investment as part of a take private transaction expected to close later in Q3. We ended the second quarter with cash and near cash of $1.4 billion, or 16% of investing capital, with liquidity expected to increase in the near term in light of the realizations I just mentioned. Looking at private equity, our PE portfolio produced a $121 million net gain, or a 2% return in Q2. the returns were fairly broad-based across our financial services, business services, and industrial businesses, while offset slightly by healthcare investments. In credit investing, our credit strategies delivered a $17 million net gain or a 1% return in Q2. The gain here was also broad-based across our credit portfolio and generally consistent with the returns for the credit market at large. Now let's turn to the asset management side of the business. Onyx ended the quarter with nearly $33 billion of fee-generating AUM. This reflects the removal of FGAUM associated with Falcon, substantially offset by $2.2 billion of new FGAUM raised across the credit and PE platforms in Q2. However, recent changes in firm-wide AUM may be masking the strong growth in our structured credit business. FGAUM and that business has grown 22% in the last 12 months, and more importantly, has been growing at an annual rate of 16% over the last four years. And a reminder, this growth has occurred while consistently requiring less and less of Onyx's balance sheet capital. In the first half of 2024, our balance sheet exposure was reduced by $93 million, driven by recurring distributions and the partial sale of equity interests more than offsetting new investments. And over the last four years, ONIX's ownership of the platform's CLO equity has decreased from 87% to 46%. With about $75 million of run rate management fees and a much less capital intensive business model, the structured credit team has done a great job building a valuable asset management franchise over the last four years. Turning to fee-related and distributable earnings, second quarter total FRE was a loss of $8 million with a $2 million loss from the asset management platform. These results improved slightly from Q1 and reflect the continued impact of cost-saving opportunities as well as lower compensation in the quarter. As we've communicated previously, the end of OP5's commitment period in late 2023 together with the change in our private wealth business model, our FRE headwinds in 2024. These will be partially offset as new fees come online from ONCAP 5, the ONIX Partners Opportunities Fund, continuation vehicles, and the growth in structured credit. Run rate management fees were $179 million at quarter end, down 18 million, primarily due to the Falcon separation. As Bobby mentioned, the decision to have Falcon operate independently was in the best interests of both businesses, given the prospects for synergies with the rest of the ONIX platform. In terms of FRE, the platform was essentially neutral to FRE over the last 12 months. The new arrangement will allow ONIX to share in potential future upside through its 20% ownership of the manager and a carried interest in the next few funds. Additionally, all contingent consideration from the acquisition of Falcon in 2020 has been waived, and Onyx's commitment to Falcon Fund 7 was reduced to $40 million from $80 million previously. Looking at distributable earnings, we generated $74 million of DE in Q2, driven by the recurring CLO distributions and the sale of Onyx's interest in Ys as part of the ONCAP continuation fund transaction. Finally, an update on ONIX's incentive and carried interest opportunity. We ended Q2 with $258 million of accrued carry, which reflects $14 million generated in the quarter, primarily from ONIX Partners 5 and ONCAP 4. As a reminder, ONIX has over $30 billion private equity and credit, AUM, subject to carry or incentive fees, which provides a meaningful opportunity for value creation going forward. In summary, we had a solid quarter with momentum building across the businesses. We will continue to prioritize decisions that allocate our resources where we have a right to compete and drive long-term value for our shareholders. That concludes the prepared remarks and we'll now be happy to take any questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Nick Preet with CIBC Capital Markets.

Okay, thanks. So you're building a substantial amount of balance sheet liquidity here, and I'm just wondering what your priorities might look like from a capital allocation standpoint. Does the experience with Falcon and Gluskin Chef reduce appetite for M&A at the Onyx Corp level? And I also noticed the buyback stepped up in the quarter, and I'm just wondering if the intent would be to keep that going.

Yeah, hi Nick, it's Bobby. capital allocation and and how to use our our wonderful balance sheet believe me is top of mind in my thinking and i hope to be able to come back to all shareholders in the coming quarters to better articulate the plans around that obviously share buybacks will continue to be a top priority for us so i don't you'll see us slowing those down anytime soon and on your question about falcon Look, M&A on the asset management side is more difficult M&A than we're kind of used to within our PE funds. Their people businesses, their culture fit and things like that are important. I don't see us prioritizing buying other asset managers in the near term when I think about capital allocation. That much I can tell you, but as for the other plans we're working on, I think I need a bit of time to be able to come back to shareholders.

Understood. Okay, that's helpful. And then this question is a bit premature, and I'm aware of that, but wondering what you might need to see in order to consider reinitiating fundraising for your larger cap buyout strategy. Is that a decision that's made in consultation with some of your larger LPs that you would expect to re-up, or do you simply have more work to do regarding return of capital first?

Yeah, so I think there's a couple of things. Firstly, you know, that opportunities fund should allow us to do, you know, four or five deals or so, depending on the use of co-invest. And importantly, Nick, the performance of Onyx Partners 5, right, And that's from an IRR and a return of capital perspective will be an important milestone to go into fund six. And it's one where our LPs are obviously rooting for us. Everybody wants that to be a good fund. But I do think we're going to need some more DPI and a bit more seasoning, which is the whole point of the Ops Fund is to have the next 18 months or so to do that, show those results, and then begin fundraising again. on a normal kind of fund structure for OP6.

Got it. Okay. And then last one for me. You've got a few relatively mature investments in the P&C insurance space. Just wondering what your read or your internal thinking is around where we're at in that cycle. It just kind of feels like the hard market cycle is pretty long in the tooth. New money rates are dropping, which has been a tailwind for the carriers anyway. What's your view on that sector? And I'm just wondering how that might inform a hold or sell decision on some of those investments.

Yeah, so what I'm seeing, because I'm on the boards of those particular companies, Russell, what I'm seeing is rates are still increasing. They're increasing at a decreasing rate, and it really varies by reinsurance or insurance, and it's even subsectors underneath of those two things, right? you know, on the balance sheet side of that industry where you're able to invest assets alongside your liabilities, there's still a tailwind there, Nick, because, you know, given that the duration of liability for a company like Convex, for example, is, you know, three to four years, dollars that were in the ground to support liabilities, even though rates are ticking down a little bit right now, are still materially higher than when those dollars got put to work, right? So, you know, But you're right, the rate increase is beginning to slow, but it's still growing. It's just slowing a bit across the board. And look, a rate is the easiest form of revenue you can get. But what I really focus on, because you can't control rate, is are we winning new volume that we like the risk pricing on? And there, I think we're doing a nice job.

Okay, that's a great color. I'll pass the line for now. Thank you.

Thank you. Our next question will come from the line of Jeffrey Kwon with RBC Capital Markets.

Hi, good morning. I just wanted to go back to the Falcon transaction. Can you elaborate on what drove it where you had the comment that the synergies were maybe not as much as initially thought and why the costs were outweighing the benefits?

Yeah, so again, I'm rooting for them. Sadiq, John, and that team, they were good partners. We own a piece of the business and are going to participate in the carry. It turned out for us, Mez was really more of a PE product than a credit product. It didn't really fit in well with the credit platform and the fundraising around the credit platform. We actually had products that were competing with each other on a return profile that were different parts um, of the balance sheet. And when we looked at that and the priorities that we wanted for our distribution team, we, we, we decided that Mez as a PE business and, but the specific thing Mez would be a tougher thing to scale over time. And that's where the sort of the limit energies we saw coming in, um, came into play. Um, like I do like the junior capital business and I think I've been pretty, um, you know, outspoken about that. But when I think about, um, where we could create shareholder value in junior capital. I don't think it's really on the asset management side in traditional sense of the word. I think it'll be on cap or OP looking at a deal that is more appropriate for a junior capital type return versus a PE return and trying to use our balance sheet to lean in on places where we really know the industry So I could see us still wanting to participate in junior capital. I do think there's going to be an opportunity from a lot of PE balance sheets that were issued in 2021, 22, where junior capital will look attractive. But I think the way to play that will be vis-a-vis the balance sheet, again, in industries where we know we have a right to compete rather than trying to scale an asset manager. And that's how we came to the decision. And like Chris said, we've been pretty clear that we're looking at things and making sure We're prioritizing our resources, and this is one of the decisions coming out of that.

Okay. No, thanks for expanding on it. Just my other question was, I think it was on Investor Day, you talked about ways to kind of reduce, let's call it the vulnerability to times when the fundraising environment is not good. And I think there were things like, you know, maybe having more funds or strategies and kind of diversifying the fundraising cycle to kind of spread it out from a time perspective. I know the fundraising environment is kind of a bit mixed at this point, but just wondering if there's kind of an update on your thoughts on how you think about the fundraising and the strategies that you've got in place and ones you may look to launch at some point.

Yeah, so look, fundraising will always be an important aspect for OP and ONCAP and credit But you can't time a fundraising market and where LPs sit within a cycle of wanting to deploy capital to PE. I think it's getting better. The market, I wouldn't say it's good, right? I think it's getting better. And there's certain LPs that were over-allocated that are becoming more balanced over time. And once that balance happens, I think you'll see the fundraising market become normalized again. Now, a normal PE market, right, might be 70% of what it was in 2021 or 22. But once the LPs get the DPI back that they need, and I still think PE is going to be an asset class people want to allocate to, it's just been slow as that imbalance has persisted for probably longer than people thought. But you really can't time the fundraising. You deploy the fund at different pace and you begin to fundraise. But I think what we need to do as an organization for the places where we do want to emphasize our CAPS team and the raising of third-party capital as being more consistently in the marketplace where we're fundraising every day, even days when we're not asking for money for a new fund. Okay.

Thank you.

Our next question will come from the line of Graham Writing with TD Securities.

Oh, good morning. Just on the fundraising theme, so it sounds like momentum is intact on the CLO front. What's the status on, and apologies if I missed it, but just the bridging fund and the on-cap fundraising, where are you at in that process?

Yeah, so on the ops fund, Chris, correct me if I'm wrong, I think we're at 810 or 820 million. At on-cap, we're at about a billion. with three months or so left in their fundraising. John Capps actually has a good pipeline of people working towards last close. I believe that's in the earnings release as well, those numbers.

Okay, so you're in the last close stages for both those funds?

Yeah.

Okay. And then with the $2.2 billion, I think you flagged it, you raised in the quarter. How much of that was from credit and how much was from equity?

Oh, I don't have that breakdown right at my fingertips, Graham. We can reach out. I know it's in the SIP somewhere, but we'll identify it and get back to you.

Okay. And then with the Falcon... Can you just flesh out what sort of capital you think this is going to free up? You mentioned a little bit, but I think you've got contingent payments that no longer do commitments maybe that are freeing up. And then, you know, it sounds like you expect the impact on FRE to be minimal, despite, I'm assuming you're losing about $20 million in run rate fees. Maybe just elaborate on that, please.

Sure. Yeah. Yeah. I think you kind of hit all the high points there. With the removal of the potential contingent or earn out payments for the 2020 acquisition, We had $15 million on our balance sheet, but the maximum amount was quite a bit more than that that they could have earned into. And then as part of the transaction as well, we took our commitment to their new fund down from $80 million to $40 million. So you can sort of think of that as $55 million of capital we don't need to reserve, if you will, for that business. Yeah. And then, you know, going back to Bobby's synergy point, you know, that business had not had scaled, but had not raised a fund of sufficient scale. And so we really was operating at a break-even, you know, fully loaded perspective for Onyx from an FRE perspective. So there's really no change there. I'll say in our run rate, FRE is also the transaction. But as Bobby said, what we want to do is really get focused on places where we think we can grow FRE meaningfully and take action on those ones.

Okay. And how much AUM actually left your platform from the Falcon there?

Around $3 billion.

Okay. Okay, that's it for me. Thank you. Thank you.

Our last question today will come from the line of Nick Preet with CIBC Capital Markets.

Yeah, thanks. I thought I'd just sneak in another question or two. I don't know a lot about the Wealth Enhancement Group, but I wanted to ask whether cash sweep income programs might represent any share of the economics of that platform like it does for the U.S. broker-dealers. It doesn't sound like it would, but I just want to confirm because of the heightened focus on that revenue stream.

I don't believe it does, and I'll confirm that with Adam Coburn, but I'm pretty close to that one. I'm pretty sure it does not, but if that's the wrong answer, I'll call you back.

Okay. No, very good. I think that's good for me. I'll leave it there. Thanks very much. Thank you.

That concludes our question and answer session. I'll now turn the conference back to Bobby LeBlanc for closing remarks.

Thank you for your time today. Thank you for your support. We will continue to be transparent and update you on our progress, and we're working hard towards thinking about future capital allocation. Enjoy the rest of your summer. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.