M.ORE/The Globe and Mail/Globe and Mail
When Onex Corp. announced in December that it would sell one of its operating companies, BrightSpring Health Services, to Wall Street LBO giant KKR & Co. Inc. for $1.3 billion (all currency in U.S. dollars except where indicated), the deal underscored the Canadian private equity firm’s reputation as a stellar player in an unglamorous field. Since taking a minority position in BrightSpring, which provides home health care services in the United States, in 2004, followed by a majority stake in 2010, Onex has scored more than a fivefold return on its investment.
Multiply this success by the scores of investments it has made since 1984, and you can understand why Onex is a major force in the global private equity sector. The deal also demonstrated—yet again—why Gerry Schwartz, Onex's 77-year-old founder and CEO, remains a vital dealmaker, despite shying away from publicity in recent years.
On its surface, Onex offers a straightforward model. It scours the world in search of undervalued or tarnished companies that it can polish up through cost-cutting, restructuring and expansion. It then holds onto, sells or lists the companies through an initial public offering. That stable of companies is also huge, making Onex a perennial Top 20 finisher in our annual ranking of Canada’s Top 1000 companies by revenue.
But many of those companies are privately held, so Onex as a whole is hard to value even for some seasoned investors. And the company’s earnings often swing widely from year to year, because profits are affected by deal-making and the shifting fair value of investments on Onex’s balance sheet. Last year, Onex reported a loss of $796 million, down from a profit of $2.4 billion in 2017.
That deal-making continues. Onex generated $1.9 billion in 2018 through the sale or IPO of several companies, and it invested $2.3 billion in nine more. It's not slowing down. In March, Onex agreed to buy Toronto-based Gluskin Sheff + Associates Inc. for $445 million (Canadian), adding high-end wealth management to its stable.
“The vast majority of gains come from the ability to make operational improvements,” says Ben Sinclair, an equity analyst at Odlum Brown. “This comes from experience and specializing in certain industries, and it's the kind of thing that Onex has done for a long time. They have a very strong track record.”
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Most of Onex's companies are not household names, and many of them are far from glitzy, but bland works. The company's portfolio has generated a 28% average gross annual internal rate of return since inception. Besides BrightSpring, Onex has turned around and profited from investments in Allison Transmission, TMS and Husky Injection Moldings, to name just three success stories.
Among the two dozen current major holdings are KidsFoundation Holdings BV, a Netherlandsbased European child-care services company, and Clarivate Analytics, which operates academic subscription services and will soon be listed on the New York Stock Exchange following a merger with Churchill Capital Group.
“The business is as complicated as you want it to be,” says Sinclair. “If you go in with the approach of wanting to count every bean, then you would say that it's a complicated business.”
No kidding. Since the majority of Onex's holdings are privately held, the value of the whole is relatively opaque. It also has various operations and funding streams, adding financial layers. On top of $6.4 billion of its own capital, the firm manages another $23.2 billion from outside investors—which include pension plans, sovereign wealth funds and financial firms—and it operates a $10.3-billion private lending fund. Onex is currently sitting on nearly $8 billion designated for new investments.
Deploying that money and helping to manage the holdings means profits are often very lumpy. No wonder some investors might prefer to skip the minutiae of Onex’s myriad parts and instead focus on the company’s three-decade history of success. Its shares have delivered gains of 7,100% over the past 32 years, including dividends. And market capitalization has increased 40-fold since 1990, to $7.5 billion (Canadian).
But Onex is always facing new challenges. Competition is fierce these days, given the number of big institutions now on the prowl for private equity investments—companies that don’t have shares trading on stock exchanges—in pursuit of stock-market-beating returns. CalPERS, the Ontario Teachers’ Pension Plan and OMERS are just three of the very active public pension plans. Big rival firms like the Carlyle Group, Blackstone, Brookfield Asset Management and KKR are also on the hunt.
According to consultancy Bain & Co., the value of private equity deals struck in 2018 jumped 10%, to $582 billion, making the past five years the strongest stretch in history for the sector. Yet firms still have about $2 trillion in dry powder, a record high that suggests buyers of assets are circling targets.
As a result, asset prices are up, once-impressive private equity returns are subsiding, and sweet deals are becoming harder to find. “It's interesting,” Schwartz said on a conference call with financial analysts in March, when discussing Onex's deal pipeline. “In this kind of an environment, all of the logic would tell you that pricing ought to be coming down. That logic applies to all of the buyers, but it doesn't seem to apply to all of the sellers.”
There are internal challenges as well. Onex is struggling with several underperforming operating companies in its portfolio, including Save-A-Lot (a U.S. discount supermarket chain), Parkdean Resorts (a U.K. holiday-parks operator) and Survitec (a U.K.-based maker of marine, aviation and defence survival equipment). Because of these setbacks, the fair value of Onex’s private equity portfolio fell 6% in 2018.
The decline is weighing on a stock price that has also been affected by volatile equity markets and rising borrowing costs. In early April, Onex's shares traded around $75 (Canadian) on the TSX, down 28% from a high in 2017. That price was also a significant discount to net asset value, after Onex had traded at a premium through much of 2016 and 2017.
“This isn’t the first time we’ve experienced underperformance,” Schwartz said in the conference call. “As anyone on our team will tell you, we’re focused on improving the performance of all of our businesses.” He added: “Turnarounds are difficult and take time to achieve. I don’t think it’s effective to measure that and look at it quarter by quarter. At best, you can look at it year by year.”
Analysts generally believe that Onex will power through this bout of turbulence. “We think it's extremely premature to conclude Onex's investing acumen has somehow degraded,” Geoffrey Kwan, an analyst at RBC Capital Markets, said in a note.
Kwan rates Onex as his “top pick,” and suggests that buying the shares when they’re trading at a discount to net asset value usually rewards investors over the longer term, as the discount narrows or disappears. After all, betting on the acumen of Schwartz and his team of dealmakers has been a sound bet for more than three decades.
Boring or brilliant?
Onex Corp. doesn't invest in the sexiest businesses, but it usually makes a lot of money helping to revamp them. Herewith, some of its biggest current holdings:
- SIG COMBIBLOC GROUP: Swiss-based global supplier of cartons and filling machines for food and beverages
- CLARIVATE ANALYTICS: The former scientific and intellectual-property data division of Thomson Reuters
- POWERSCHOOL: California-based supplier of administration and classroom software for schools
- SAVE-A-LOT: Discount U.S. supermarket chain with 1,300 stores in 36 states
- CARESTREAM HEALTH: Medical imaging and health care technology (formerly the health care division of Eastman Kodak)
- PARKDEAN RESORTS: The largest holiday-park operator in the United Kingdom
David Berman