A Private Equity Pioneer Thrives in the Shadows
The modern private equity industry was born in the 1970s at Bear Stearns, where Jerome Kohlberg started financing acquisitions with borrowed money, using the assets of the target company as collateral. Kohlberg struck out on his own in 1976 and, along with two other Bear Stearns alums, Henry Kravis and George Roberts, founded the firm that became KKR. A few months later, another Bear Stearns banker, Gerry Schwartz, left and took the strategy home to Canada. “I’d always felt like a Canadian living in the U.S.,” Schwartz says in his Toronto office. “I wanted to come back here.”
After doing buyouts with a partner for several years, Schwartz founded Onex in 1984. He’s been going strong ever since—albeit in the shadow of KKR and other big American rivals. Onex has achieved a 28 percent internal rate of return on its investments over 30 years, topping KKR at 26 percent since 1976. Publicly traded since 1987, the stock has returned 1,225 percent, compared with 581 percent for the Standard & Poor’s 500-stock index, and made Schwartz, 72, a billionaire. Last year he earned $85 million, almost as much as KKR’s Kravis and Roberts combined. The stock gained 14.5 percent this year through June 24, well ahead of rival Blackstone Group at 3.7 percent. KKR and Carlyle Group are each down about 3 percent, and Apollo Global Management has fallen 14.4 percent.
Despite its track record and the fact that Onex has made $6 of equity investments in the U.S. for every $1 in Canada, Schwartz says he feels his company 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,” he says. “They think we’re a Canadian firm.” David Fann, chief executive officer of San Diego-based TorreyCove Capital Partners, which advises private equity investors, says Onex is “a consistent performer” but is “the guy nobody has ever heard of. I think it is because they are Canadian.” Size may also be an issue: Onex has $21 billion in assets; KKR and Carlyle manage $102 billion and $199 billion, respectively.
Being smaller can be a plus. Onex hasn’t felt the pressure to diversify into other money-management businesses. About 80 percent of its assets are in private equity, with much of the rest in a division devoted to buying and selling loans. KKR has slightly more than half its assets in private equity, and Apollo, Blackstone, and Carlyle have less than that. Onex tends to stick close to the industries it knows well, particularly manufacturing, and is more inclined, Schwartz says, to get involved in running businesses in which it invests. At a recent meeting with investors, Bobby Le Blanc, Onex’s New York-based senior managing director, said the company prefers targets with a “little more hair on them”—those that can be bought at a lower price but require more fixing up. “When we get those right, they really lead to good outcomes,” he says.
Onex remains small enough to get by without having a formal investment committee, says 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 weekly Monday meeting, at which new deals and existing investments are debated. “We’re actually trying to teach our professionals what an Onex deal looks like,” Mersky says. In the 10 years or so it takes to become a managing director, an Onex banker has seen roughly 75 deals, Mersky says, while someone at another company might see only a dozen.
Mersky says the challenge for Onex these days is making any deals at all. With valuations high and too many firms chasing too few opportunities, attractive targets are scarce. Instead, Onex has been slimming its portfolio. In March it sold insurer Warranty Group to TPG Capital for $1.5 billion, tripling its investment. Soon afterward it sold the Gates Corp., a maker of industrial equipment, to Blackstone for $5.4 billion.
Ideally, Onex would make two or three acquisitions a year, Schwartz says. Yet he’s content to wait until circumstances change. He’s done that before: From late 1987 to early 1990, Onex didn’t buy a single business, positioning itself to pounce when a recession hit in the early 1990s, depressing the prices of potential acquisitions. Schwartz says he thinks prospects may be improving. He cites a slowdown in bidding for assets that are just OK and the Federal Reserve’s pressuring banks to be more conservative in making highly leveraged loans for acquisitions. Those are “early signs of a shift, not a change,” he says. “It’s still a seller’s market.”