The best performer of the biggest publicly traded private-equity firms this year won’t be found among U.S. giants such as Blackstone Group LP or KKR & Co. The leader is Canada’s own contender, the dark horse in the race, Gerry Schwartz’s Onex Corp.
With a 15 percent stock gain, Onex is running well ahead of Blackstone at 3.8 percent. KKR and Carlyle Group LP are both down more than 2 percent while Apollo Global Management LLC has dropped 15 percent. The results aren’t surprising when you consider that Onex has generated a gross internal rate of return of 28 percent since its inception 30 years ago, topping KKR at 26 percent since its start in 1976.
Founded by Canadian billionaire Schwartz, who cut his teeth at Bear Stearns & Co. in the 1970s under the tutelage of the legendary Jerome Kohlberg, Toronto-based Onex has also earned billions from recent asset sales.
The performance helps explain why Schwartz raked in $85 million in total compensation last year, nearly as much as Henry Kravis and George Roberts combined.
Despite its enviable track record and the fact Onex has invested about six times as much money in the U.S. as Canada, Schwartz said he feels his firm doesn’t get the respect it deserves south of the border.
“We think we’re a North American firm with operations in the United States,” Schwartz said in an interview at Onex headquarters overlooking Lake Ontario. “They think we’re a Canadian firm.”
He’s not the only one.
“They’re a very solid, consistent performing firm that just isn’t well known in the United States,” said David Fann, chief executive officer of San Diego-based TorreyCove Capital Partners, which advises private-equity investors. “It’s the guy nobody has ever heard of. I think it is because they are Canadian.”
Schwartz, a measured 72-year-old whose serious demeanor masks a secret delight in performing magic tricks and a pretty good Ronald Reagan impersonation, has been in the leveraged buyout game since its beginning.
A lawyer by training, he left Canada in 1968 for Harvard Business School before joining Bears Stearns in the early 1970s, where Kohlberg was inventing a new form of transaction in which acquisitions were financed with borrowed money secured against the assets of the target. He worked alongside a pair of first cousins named Henry Kravis and George Roberts.
When Kohlberg struck out on his own in 1976, Kravis and Roberts joined him at the newly formed KKR. Schwartz left Bear Stearns a few months later, taking the formula home to Canada alongside his hometown mentor Izzy Asper, a lawyer from Winnipeg, Manitoba.
“I’d always felt like a Canadian living in the U.S.,” Schwartz said this month. “I had never become a citizen. I love the U.S. I love doing business there. I have a lot of my family there now. I wanted to be Canadian. I wanted to come back here.”
According to his former boss, Schwartz wasn’t purposely excluded from the KKR group. “Gerald Schwartz was a good man and always intended to go out on his own,” Kohlberg said in an e-mail. Kravis and Roberts declined to comment.
In 1984, after splitting with Asper, he started Onex. Three years later, it became the first of its competitors to go public, beating Blackstone by nearly two decades.
The early going was rough. The shares debuted at C$20.50 and then took a nosedive on Black Monday in October 1987. From their new normal at C$6, the shares have climbed steadily over the years to the equivalent of C$264, taking into consideration two stock splits. Onex says that puts Schwartz’s holdings at $1.2 billion including deferred shares, according to company filings.
Schwartz and his wife Heather Reisman, founder and CEO of Indigo Music and Books Inc., occupy commanding heights among Canada’s power couples. Michael Douglas and Catherine Zeta-Jones have been guests at their Rosedale home during the Toronto International Film Festival. Arianna Huffington, a friend who made Reisman editor-at-large of Huffington Post Canada, was named to Onex’s board of directors last month.
Lacking the same size or brand recognition as its larger U.S. rivals has forced Onex to develop its own style. It tends to stick close to industries it knows well, particularly manufacturing, and is more inclined, Schwartz said, to roll up its sleeves operating businesses. TorreyCove’s Fann describes it as “a very nose-to-the-grindstone type of approach,” one that’s worked for Onex.
At a recent investor day, Bobby Le Blanc, Onex’s New York-based senior managing director, said the firm tends to prefer targets with a “little more hair on them,” meaning they can be bought at a lower price but require more fixing up. “When we get those right, they really lead to good outcomes,” he said.
Onex also views relationship building as a key comparative advantage over more transaction-oriented competitors. In the current crowded playing field, Schwartz places increasing emphasis on what he calls Onex’s “proprietary value” - its ability to leverage past successes for future advantage.
He cites the 2005 purchase of Spirit AeroSystems Holdings Inc. Boeing Co. was considering hiving off its Wichita and Tulsa aircraft parts business when Onex came out of the woodwork.
Handing over the keys of one of its essential suppliers to an unknown entity represented a risk that left some Boeing executives queasy. What if Onex proved unable to produce the fuselages Boeing needed when it needed them? What if they were just a bunch of corporate raiders from the north?
Schwartz, anticipating these questions from Boeing’s management, suggested they reach out to Robert Crandall, then CEO of American Airlines. Onex had been a supplier for the airline after acquiring its catering business, Sky Chefs, in 1986 and operating it for 16 years.
Crandall was quick to speak up for Onex. “I would always be willing to confirm good performance by a supplier – why not?” Crandall said in an e-mail exchange recalling the events. “They were a reliable business partner. Gerry is an outstanding executive, whose handshake is his bond.”
Then executive chairman Lewis Platt also stepped up to speak favorably about his experience with Onex when he ran Hewlett-Packard Co.
“We were able to buy a company almost entirely based on our reputation,” Schwartz said. “Our reputation got us more than money could. Our money’s no better than anybody else. Our reputation is better than some.”
Spirit AeroSystems is now publicly traded and has returned $2.9 billion to Onex and its partners since their initial $375 million investment. They still hold about 8 million shares, valued at about $270 million.
Onex has also had its misses, as with executive jet maker Hawker Beechcraft, which it purchased in March 2007, just before the onset of the economic crisis and a new stigma attached to private aviation. These factors conspired to sink the company into bankruptcy five years later, costing Onex its $517 million investment.
Like many private-equity operators, Onex is in the midst of an extended dry spell for acquisitions. With too many firms chasing too few opportunities, it has reversed field, peddling The Warranty Group for a three-fold return of $1.5 billion in March, followed by the sale of Gates Corp. to Blackstone for $5.4 billion.
Schwartz is a precise and disciplined man. He takes his time answering questions. He isn’t one for uncharted adventures or surrendering the wheel to chance. One of Onex’s core principles is that it focuses on businesses with more “controllable outcomes.”
Schwartz doesn’t want his destiny in the hands of “outside factors that I could have no control over,” which is one of the reasons he’s steered clear of energy and mining, two Canadian mainstay industries highly sensitive to macro-economic and geo-political events.
In his perfect world, Onex would make two or three acquisitions a year. Yet he’s perfectly content keeping his powder dry until changed circumstances create better opportunities. He’s done it before. Between late 1987 and early 1990, Onex didn’t buy a single business - leaving it in position to pounce when a recession hit in the early 1990s.
Schwartz sees some straws in the wind that a buyer’s market may be returning.
“Early signs of a shift. Not a change. It’s still a seller’s market,” he said. These straws include a slowdown in overheated bids for just ’ok’ assets, and banks starting to feel pushback from the Federal Reserve on the underwriting of aggressive leveraged credit.
In the meantime, Onex has been focusing on building out its credit business, including raising the largest collateralized loan obligation in the U.S. this year for $1 billion. Onex aims to double its credit assets under management to $10 billion by 2017.
“I think that Onex is being very smart by limiting the size of their funds and really targeting the size of transactions that have made them successful in the past,” said Andre Bourbonnais, senior vice president of private investments at the Canada Pension Plan Investment Board.
With $21 billion in assets under management as of March 31, Onex is a fraction of the size of private-equity firms like KKR or Carlyle Group, which have $102 billion and $199 billion in assets respectively. Schwartz argues that these other firms have moved into the asset-management space while Onex has remained committed to being more of a pure investor. Fully 80 percent of its assets are in private equity versus more than half for KKR and less for Apollo, Carlyle and Blackstone.
“We’ve wanted to keep our focus on being investors,” Schwartz said. “While we have been fortunate to have been able to build an asset-management activity, we’re building it in a very narrow way in credit. We don’t have a real estate fund. We don’t have an energy fund. We don’t have a mining fund.”
Onex sees other value in being smaller. Unlike other firms, it remains sufficiently compact to forgo a formal investment committee, said Senior Managing Director Seth Mersky. Instead, all 42 members of the private-equity investment team - some listening in from offices in New York and London - participate in a noon meeting each Monday. That’s when new deals and existing investments are debated.
“What we’re trying to do, in addition to making good investment decisions by involving different viewpoints and age groups, we’re actually trying to teach our professionals what an Onex deal looks like,” Mersky said.
That means by the time they are promoted to managing director after 10 years or so, an Onex employee has seen roughly 75 deals move through the process, compared with a dozen at another firm, he said.
Schwartz said Onex’s approach produces the side benefit of creating a larger pool of qualified contenders for succession planning. He said he has no plans to go anywhere. “On the other hand, succession has taken place here starting a long time ago. It’s why those Monday meetings have everybody.”
Schwartz isn’t the type to boast. But with a pay packet last year nearly double either Kravis or Roberts, you get the sense of some inner satisfaction, even if it was an outlier year.
“Private equity does pay very well and my counterparts, guys that I grew up with who are still working at a number of firms, all make a lot of money,” he said. “I’m poorly paid compared to them.”
Perhaps. But $85 million shows some respect.