Onex Bets on CLOs After Gain on Private Equity

Onex Corp., whose shares have reached a record on a surge of private-equity deals, is seeking to expand in the credit business, including sales of collateralized loan obligations.

“We’re very keen to continue growing that business,” said Seth Mersky, senior managing director at Onex, Canada’s largest publicly listed buyout firm, in phone interview on March 13. “For the foreseeable future it will be dwarfed by the private equity funds, but, that said, it will be an important source of assets under management and fees.”

Toronto-based Onex has soared 28 percent over the past 12 months as of March 14, outstripping the 3.4 percent gain in the benchmark Standard & Poor’s/TSX composite index. It closed at an all-time high of C$47.63 on March 11, the highest close since its initial offering in May 1987.

Onex was little changed to C$47.47 at the 4 p.m. close in Toronto and has a market value of C$5.41 billion ($5.31 billion).

The firm, lead by Chief Executive Officer and founder Gerry Schwartz, acquired five businesses last year, guided Allison Transmission Holdings Inc. to a $690 million initial public offering that more than doubled Onex’s investment in the auto-parts maker and raised $840 million in two CLOs, the company’s first.

“They’re realizing their investments, the pipeline is full and they’re raising more money, so they’re firing on all cylinders,” said Jennifer Radman, a fund manager with Caldwell Investment Management Ltd. in Toronto, who helps manage about C$1 billion including Onex shares.

Lowest Costs

The company runs two main private equity funds -- the large-cap Onex Partners funds which returned 17 percent last year and the small-cap Oncap funds, which returned 23 percent in the same period. It manages about $8.8 billion in total third-party assets, including $1.8 billion in the Onex Credit Partners debt unit, the company said in its year-end earnings.

Onex Credit raised about $840 million in two CLOs last year while Citigroup Inc. raised an additional $512.1 million CLO for the unit, said a person with direct knowledge of the deal who asked not to be identified because the terms are private.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return. Money managers are raising CLOs at the lowest borrowing costs since the financial crisis, increasing the appeal of investment in high-yield loans and bonds Onex can use as fodder for CLO creation.

Allison Transmission

“The credit markets have been very co-operative, but the IPO markets for anything other than very sexy-growth companies has not been,” Mersky said.

Merskey said he is optimistic the IPO market is picking up. Companies have raised $6.79 billion in initial public offerings in the U.S. this year, up 86 percent from the same period a year ago, according to data compiled by Bloomberg.

In 2012, Onex guided Allison Transmission through an initial public offering at $23 a share in March, compared with Onex’s original cost of $8.44 a share. It also sold the Center for Diagnostic Imaging Inc., based in Minneapolis in July, for $145 million including a prior distribution, doubling its initial investment of $73 million in 2005.

The company also opened up an office in London and invested $1.4 billion to buy five businesses: SGS International, a graphic services company; KraussMaffei AG, a German manufacturer; USI Insurance Services, BBAM LP, a commercial jet aircraft manager; and Bradshaw International Inc., a kitchen products designer.

Growth Foundation

“These activities likely set the foundation for further growth,” said Phil Hardie, analyst with Scotia Capital Inc., in a note on Feb. 22 after Onex disclosed its fourth-quarter earnings. “Onex was surprisingly busy in 2012.”

Onex reported profit of $39 million in 2012 compared with $1.6 billion in 2011, which included $1.7 billion of earnings relating to the sales of Husky International and Emergency Medical Services Corporation. Revenue rose 11 percent to $27.4 billion.

Investing in Europe is a risk due to the ongoing credit crisis and potential for flare ups, as seen with the recent Italian election impasse, said Scott Chan, an analyst with Canaccord Genuity, in a phone interview from Toronto.

“It’s a risk but you also see the better valuations in Europe,” Chan said. “They won’t overpay for something. They’re using a slow-and-steady process.”

Hiring staff

Onex is aware of the political situation in Europe, Mersky said. The company has three employees in London, and is aiming to hire two to three more staff, he said. The company employs 150 people globally, said Emilie Blouin, a spokeswoman with Onex.

“Our hope is the political turmoil in their capital markets will present opportunities to us and for us to buy the types of businesses we buy over here,” Mersky said. “We’re aware of the situation in Europe. It doesn’t mean good businesses don’t become available.”

Radman does not expect Onex to repeat its stellar share performance of the past year after such a flurry of activity, instead estimating growth of 10 percent to 15 percent in a quieter 2013 as the company fundraises and prepares its existing holdings for sale.

“They tend to have strong years when they sell things,” she said.

Historical Discount

Brandon Snow, a fund manager with CI Investments Inc.’s Cambridge Advisors unit in Toronto who helps manage C$6 billion and owns Onex shares, said Onex has persuaded analysts to view it as an investment firm and not a holding company, which makes the business less opaque and easier to value. This has helped remove the historical discount to its net asset value, Snow said. He said he hopes to be able to buy it at a better valuation as “it’s had a good run.”

“This is one of the stocks where I’d be fine plunking it into a portfolio and leaving it for 10 years,” Caldwell’s Radman said. “They’re professional money managers and you’re getting what the biggest pension funds in the country are getting, without any of the costs. You just own the stock. It’s a no-brainer.”

(Company corrects number of employees in 18th paragraph in story published March 15.)
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