Onex Sticking to Growth Target Despite Missing in Recent Yearsby
Private equity firm says 15 percent growth strategy achievable
Volatilty in credit markets and cash pile seen hurting returns
Onex Corp., Canada’s largest buyout firm, says it has no plans to alter its long-term growth target despite dramatically underperforming on that goal over the past two years amid volatility in the credit markets.
The Toronto-based private equity firm set a target of increasing the amount of capital it has invested per share by 15 percent each year. Between 2010 and 2013, those goals were readily achieved.
But in the past two years, the metric fell to 3.3 percent. That has been largely because of a surplus of cash sitting on its books with volatility in the credit markets making it hard to find acquisitions, management said at its investor day Tuesday in Toronto.
Bobby Le Blanc, an Onex senior managing director, said despite the challenges in the market the firm has no intention of changing its long-term strategy.
“I don’t actually see that goal changing every couple of years if we’re doing our jobs right,” he said during a panel discussion. “I think you should expect it from us.”
$2 Billion Pile
Le Blanc said he was encouraged that Onex may finally be able to start deploying some of its $2 billion cash pile with the credit markets loosening up a bit in recent months.
The company now has about 38 percent of its net asset value per share in cash, well above its stated goal of about 25 percent, management said during its presentation.
“The current flow of opportunities has gotten a lot better for us over the last three to four months,” Le Blanc said. “All I can tell you is it’s much better today than it was in the first quarter of this year because the credit markets opened up.”
Seth Mersky, another Onex senior managing director, said the issues in the credit markets have been compounded by persistently low interest rates. If CEOs don’t have strong alternatives for the proceeds they will receive from a business, they’re less likely to sell even if they aren’t getting a strong return, he said. That’s creating fewer buying opportunities.
“The most challenging time periods for us, frankly, are when there aren’t a lot of acquisition opportunities coming our way,” Mersky said, noting that Onex has been in that position for much of the past year and a half.
Paul Holden, a Toronto-based analyst at Canadian Imperial Bank of Commerce, said he still believes the goal of 15 percent growth in capital invested per share is achievable over the long term. He expects the current market conditions to drag on Onex’s performance for the remainder of this year and into 2017 as more private-equity players chase fewer opportunities.
He rates Onex’s stock the equivalent of hold and has a C$79 a share price target. The shares traded at C$79.83 at 4 p.m. in Toronto.
Investors should be heartened by Onex’s insistence that it will stay the course, Holden said.
“What reflects well on management is they don’t rush to do anything new or stupid,” he said. “They’re going to be patient capital, and that’s probably ideally what you want as a long-term shareholder.”
Onex Chief Executive Officer Gerry Schwartz said there have been periods, including from 1988 through 1990, when Onex didn’t buy any businesses. He noted the value of Onex shares have grown nearly 2,000 percent since then, or about 11 percent a year, taking into consideration stock splits. That is largely due to the 28 percent internal rate of return Onex has seen on its investments over that period, he said.
“This is a business that should, and I believe will, perform extremely well relative to the risks taken, but over a fairly long period of time,” Schwartz said.